Trading Systems, Fibonacci and Forex Q & A

Trading Systems, Fibonacci and Forex Q & A
By Ed Ponsi

Greetings from New York City! I have some great email questions this week about a variety of topics – please keep those questions coming! Let's get started with a question about trading during the U.K. session…

Q) Hello Ed! I've been following you for the past year or so; I like your articles! I have a full time job, and I'm almost sure that I will not be able to wake up around 2 or 3 AM to trade when the London markets open. Is there any pair that I could trade after 5 PM ET? That's when I get home from work ... I think I heard that Australian markets open at 5 PM ET...so AUD/USD would be a good pair to trade (I'm also wondering about volume at this time of day).

Ed Ponsi) Thank you for your question. There was a time when I used to get up around 3:00 am (New York time) to place trades at the beginning of the London session. Since London is 5 hours ahead of New York, 3 am New York time translates to 8 am London time – a time of day when breakouts are common. Breakouts are common at the beginning of the London session because London is the world's capital of Forex trading. There is a tremendous rush of volume that enters the market at this time because so many big institutional traders are based in the U.K. and Europe. It is also the time of day when economic news out of the U.K. hits the newswires. Here's an example; on December 1, 2008, the GBP/USD broke out of a sideways consolidation at around 8 am London time (3 am New York time). The pair fell nearly 400 pips over the next eight hours (see figure 1).

Figure 1: GBP/USD hourly chart shows a breakout at the start of the U.K. session. Source: Saxo Bank

If you are looking for particular pairs to trade at around 5 pm New York time, you are correct to be concerned about volume. 5 pm Eastern is a "dead zone", and any moves that occur at that time are likely to retrace. If you are working regular hours and do not wish to get up early, why not wait until the Asian markets really get rolling, around 7 pm New York time? The Japanese Yen tends to be very active from about 7 pm to midnight, so you might find great trades in EUR/JPY, GBP/JPY, and of course USD/JPY. Good luck!

Q) Great article and agree with your conclusions. On the subject of Fib fans and arcs, I believe the reason why they work is because of business cycles, reporting periods and accounting periods. There could a coincidental reason why an FX pair has a major turn about the same time each year or it could be that the flow of money may have something to do with it. Small turns are not as obvious but the major ones are. Time, price and astronomical observations are what Gann theory is based on and I postulate the time factor is what makes arcs and fans tend to work.

There are so many unanswered occurrences in life and we are never going to be able to explain them so your simplistic approach works fine. I tried for almost a decade to get Gann theory to work and now believe that simple is best. Our psychological side I believe is more important than all of this complexity.

Ed Ponsi) Very well put. I also made that journey from simple support and resistance to gradually more and more complicated systems, culminating in Elliot Wave and Gann techniques, and guess where I wound up? I ended up right back where I started, with simple but robust trading techniques that are based on market tendencies. I think it is intuitive for intelligent traders to believe that highly complicated systems might be more effective than simple techniques, but my experience has been the opposite – it was the simple things that wound up being the most effective, at least for me. To me, this is just another example of the counter-intuitive nature of trading. For the uninitiated, here is a Gann wheel (see figure 2).

Figure 2: A Gann wheel, designed to predict both price and timing of market moves. Source: Acrotec

Q) Dear Ed, thanks a lot for your informative articles on Forex trading. I've been a Forex trader for over one year. I have tried Forex signals, trading systems, trade analysis from pros. But still it ain't easy. My main question is, what is your comment on the trading systems out there? Is there anyone that you have ever tried and what were the results? I subscribed to XXX (signal provider company name removed by E.P.) but it made me lose a lot of money (demo of course). I also subscribed to another signal provider who was also so inaccurate. Please start a debate about the trading systems.

Ed Ponsi) Thank you for your email, I'm very thankful that you decided to try out this trading system in a demo account. I wish there were more room for debate on this topic, but I feel strongly that there is little of anything of value to new traders in the form of signal services, trading systems, etc. – in fact, there are many shady operators working in this area. I would like to refer you to an earlier article that I wrote on this topic titled, "Scamming the Scammers", that might be helpful in understanding this part of the trading world.

Most of these scammers measure their "performance" in terms of how many pips they made. What they don't tell you is how many pips they lost. By the way, no real trader measures his or her performance in this manner. Real traders measure performance in terms of percentage gains/losses over the course of a month, quarter, year, or since inception.

Here's the bottom line – you have to learn how to trust your own analysis. This can only be done by doing the work and learning to trade correctly. Once you can analyze currencies yourself, you'll stop looking to outside sources such as the ones mentioned above. Signal services and trading systems may seem like nice shortcuts to the novice trader, but they only serve to delay the real work that needs to be done. Good luck!