Forex Q&A with Ed Ponsi
We have some great questions from our readers this week; please keep them coming! Most of these relate to our recent discussion on volume, starting with a star pupil from Canada who is now managing money professionally. Here we go!
Q) I was reading your articles on the volume in Forex and I would have to say that the numbers are actually not as increased as people think they are. Correct me if I am wrong, the actual daily dollar value is up, but the true value of a US dollar is actually less today than it was a few years back. So the daily dollar value is greater but people must also take into consideration that a buck is less today than what it used to be.
By the way, how are things with you? Keep up the good work, and I know I have said it before but thanks for the great course; it really set me in the correct direction and gave me the foundation to build on.
Ed Ponsi) The student has become the master! Just kidding, as usual you are always asking the right questions and making astute observations. It's a pleasure to have students like you in the class, and you deserve 100% credit for your success. You are absolutely correct – since the U.S. Dollar has taken such a beating over the past seven years, we must consider that the increase in Forex volume would have been less (as measured in USD) if the greenback had maintained its value. Still, Forex as a retail instrument is growing at an incredible rate - so much so that some of the world's biggest banks are finally entering the retail market. Expect volume figures to explode in the coming years if this trend continues, as major financial institutions begin to offer Forex trading to their clients alongside other services. With the biggest names in trading and investment just now entering the field, retail Forex trading might become as commonplace and mainstream as stock trading.
Q) Thanks Ed, as always good stuff. So if key times have volume significance, would it be safe to say then that a breakout occurring at 5 pm Eastern time should fail at a major support or resistance level, and one appearing at a key time like 3 am Eastern time should plow through most support and resistance levels? Also are the prints a valid tool in Forex trading like stocks? Would we see tremendous velocity at the key times on them to gauge which direction to take a trade?
Ed Ponsi) Thank you for your email, you're definitely on the right track. Not only do breakouts that occur at or around 5 pm Eastern time tend to fail, they usually fizzle out before they reach any significant support or resistance levels. Because of this, moves that occur at this time of day make excellent candidates for "fade" techniques, which is a type of trade that goes against a breakout because of the assumption that the move will not follow through. On the other hand, moves that occur after 3 am Eastern time have a better chance of success. In cases such as this, an opening range breakout strategy would be more appropriate. It's not unusual to see strong breakouts early in the London session, due to an increase in volume and the increased possibility of major economic news releases, so a fade strategy would be less likely to work at that time.
It would be difficult to discern any meaningful information from time and sales, or prints, in the Forex market, because not every trade would be included; this is due to the vast size of the currency markets. Since there is no central location where all Forex trades are processed, no individual or entity would have the ability to tally all of these trades and put them together. Because of this, whatever prints you are viewing show only a partial snapshot of what is really happening in the overall market, a snapshot that may or may not be representative of what is really going on. Because of this, it would be dangerous to read too much into prints on the Forex market.
Q) Hi Ed, I was wondering if you would do the honor of providing a brief description - maybe 2 or 3 paragraphs - describing your primary approach to foreign exchange trading from a strategy perspective.
Ed Ponsi) Thank you for your question. Regarding technique, I'm primarily a trend trader. I look for situations where the technicals mesh with the fundamentals - if there is a clear trend in place, and if the fundamentals confirm what I see on the chart, I'm going to try to grab a chunk of that trend. One thing I'm very cautious about is trading the breakout - if the trend is moving upwards, I want to go long but I don't want to buy into a currency as it's hitting new highs. Because there are so many false breakouts in Forex trading, my strategy is to try to catch the pullbacks. That way, even if the currency pair fails to break through, there is still some potential for profit when the pair reaches resistance.
One of my favorite situations is a false breakout that moves against the trend. These types of breakouts have a high failure rate, and they also set the stage for a "slingshot" trade in the opposite direction. It's a great setup, and I'm constantly looking for it. If the trend is strong enough, I might not use a target at all; instead, I'll trail a stop. I like to trail stops manually, moving them strategically instead of automatically. That way, I can keep my stop beneath a trend line or a moving average, instead of moving it to an arbitrary location - which is often exactly what happens when we use automatic trailing stops.
Q) I am nearing the end of my enlistment in the Army and my goal is to become a professional trader. Do you have any advice that I might solicit on starting out? I would highly value any suggestions and experiences you could share with me.
Ed Ponsi) Thank you for your question. When I started out, I traded for a few years on my own, and then went to work for a firm on Wall Street...that's where it all came together. By working as an employee at a trading firm, I learned a lot of the finer points of trading that I write about in this column.
My best advice would be to build a track record of at least six months of profitable trading, and then try to parlay that into a job as a trader. Trading jobs exist in various places all over the US, although there are higher concentrations in certain areas like New York and Chicago. Your military background is a plus; it indicates that you can follow a structured system of rules. The ability to maintain discipline while trading is one of the main ingredients to a successful career.
Finally, if you are really serious about this, there is nothing that can stop you. Some firms might have requirements that are difficult to satisfy; for example, some quant firms require a degree in mathematics. But others are only interested in one thing - can you trade successfully? If you can prove that you can, you will eventually knock on a door that will be opened to you. Good luck!
