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I've been posting my videos and analysis on Twitter...check it out!

edponsi on Twitter.com

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Ed Ponsi on CNBC and Forex TV

Hi gang, here are two links that were filmed on Oct. 29.

Please note that on this one, I noted that yesterday's reaction to the US GDP was unjustified:

CNBC

Please note that at the end of this one, I recommended reloading EURCHF, which blasted off today:

ForexTV

Good Times! Have a nice weekend everybody!

Ed

Ed Ponsi on CNBC

Airtime: Wed. Sept. 23 2009 | 6:20 PM ET

Go long on a basket of commodity currencies, like the Aussie, the kiwi and the Canadian dollar, says Ed Ponsi, president at FXEducator.com. He speaks to Stephen Halmarick, head of investment markets research at Colonial First State, CNBC's Karen Tso and CNBC's Sri Jegarajah.

CLICK HERE TO VIEW THE VIDEO!!!

Ed Ponsi on CNBC

Ed Ponsi, president at FXEducator.com tells CNBC's Karen Tso and Steve Johnson, managing director at the Intelligent Investor that the economy is not headed for a double dip due to the positive economic data of late.

CLICK HERE TO VIEW!

Ed Ponsi on Forex TV:

CLICK HERE TO VIEW!

PM Exchange - FX Educator's Ponsi discusses performing commodity currencies

ForexTV - RBNZ and RBA make FX-moving comments. USD falls. Ed Ponsi comments on the SNB intervention impacting CHF.

CLICK HERE TO VIEW THE VIDEO!!

Ed Ponsi interview in "Stocks and Commodities" Magazine

Check out this interview in the new issue of "Technical Analysis of Stocks and Commodities":

http://www.traders.com/Documentation/FEEDbk_Docs/2009/08/Interview.html

Ed Ponsi on ForexTV - July 9,2009

A currency discussion covering the Group of Eight, the IMF gdp estimates, a technical breakdown in USD/JPY, correlations between stocks and forex, and much more.

Click here to watch!

Say Hello To My Little Friend....

Minimal posting lately as I have been spending time with my lovely newborn daughter. Here she is...

Forex Hedging, R.I.P.

Forex Hedging, R.I.P.
By Ed Ponsi, FXEducator.com

New rules are about to go into effect in the Forex market; how will these changes affect you?

This is from the NFA, dated April 13, 2009:

"New Compliance Rule 2-43(b) requires an FDM to offset positions in a customer account on a first-in, first-out basis, thereby prohibiting a trading practice commonly referred to as "hedging." A customer may, however, direct the FDM to offset same-size transactions even if there are older transactions of a different size. Rule 2-43(b) is effective for any positions established after May 15, 2009. Offsetting positions that were established prior to the effective date do not have to be liquidated, but once either position is closed out after May 15, it may not be reestablished as a hedge."

http://www.nfa.futures.org/news/news...ArticleID=2 273

What does this mean to you? The NFA is banning the practice of simultaneously establishing a long and short position on a single currency pair, popularly known as "hedging." Forex brokers (referred to here as FDM's, or Forex Dealer Merchants) have allowed this practice for years, which can be useful under the proper circumstances. For instance, suppose that a trader is bullish EUR/USD in the long term, but is bearish on the same currency pair in the short term. Under the old rules, a trader could maintain a long position and a short position in EUR/USD simultaneously. The NFA is concerned that brokers have found a way to allow traders to establish a "flat" position while charging two commissions. This will no longer be allowed as of May 15.

The strangest comment I heard about this came from a message board where a poster derided the decision, saying the NFA was "favoring the brokers again." Just for the record, there never was a rule that stated FDM's had to allow their clients to establish simultaneous positions. Who do you think came up with the idea to allow traders to "hedge" in the first place? The brokers, of course, but now that option is about to disappear.
Questions of the Week

Q) Hi Ed, I have a day job from 9-6pm and won't be able to take advantage of the active movement of price during those hours. I would like some help on what markets are suitable for 7pm-12am trading and what market data is preferred. Thanks, Narendra

Ed Ponsi) Hi Narendra, thank you for your question. If you are referring to 7pm-12am Eastern time, then you could trade during what Forex traders refer to as the Asian session. Many U.S. East coast traders come home from work, enjoy dinner, and then sit down at their computers to monitor the action from the Far East, which begins around 7pm. Asian markets become active at that time because while it is evening in New York, it is also morning in Tokyo, Singapore, Hong Kong, Sydney, and other major Forex trading centers in Asia. The Japanese Yen and Australian Dollar pairs become particularly active at this time, but major pairs like EUR/USD and GBP/USD also see some volatility.

Another option is to become less of a day trader and more of a Forex swing or position trader. Taking a longer view and using longer time frames (4-hour, daily, weekly charts) allows traders to enjoy the benefits of Forex trading without being tethered to a computer. Many traders simply place entry orders into the trading platform, along with associated stop and exit orders, and might not even be present when those orders execute. If I'm using a trading strategy that requires a specific entry point, I can set up a series of One-Cancels-Other orders, also known as OCO orders. When I use this method, my protective stop and target orders are not activated until the entry is executed. When the stop and target are activated, only one or the other can be executed – as soon as this execution occurs, the remaining order is cancelled.

Because Forex is so liquid, with an estimated turnover of $3.2 trillion USD per day, the chance of having the price gap beyond your stop is greatly reduced, but it still could happen. This style of trading is not for everyone, so just like any other trading tactic, try it repeatedly in a demo account before attempting this with real money. Good luck!

Q) Hi Ed, I have never traded currencies, but I might be interested. Is there a good robot that can trade currencies for me? Or are the ads I have seen about Forex robots a scam? Thank you, John

Ed Ponsi) Hi John, thank you for your question. I'm sure you remember the old saying that if something sounds too good to be true, it probably is too good to be true. I know how great the idea sounds, that a machine will somehow place all the trades for you, but think about this – are real Wall Street traders making critical buy and sell decisions based on a robot? Have you seen anyone on the floor of the NYSE or the NYMEX or any exchange using a box with red and green arrows? The truth is, most of the outfits that sell this junk are scammers. In fact, one particularly slimy vendor is even placing ads suggesting that I recommend their software. If they have to lie to you just to get your attention, how good could the product be?

The fact is, there is no magic bullet or Holy Grail in trading. No robot or green light/red light system can beat the markets for more than a short period of time, because these programs do not adjust well to changes in the market – and markets change constantly. The only answer is to get a real education in trading. An educated trader can adjust his or her techniques and adapt to changes in the markets, and can out-trade any so-called robot. You'll have to be willing to do some work, learn techniques, and put some effort into the process, but it is well worth it. The only people getting rich with trading robots are the scam artists who sell them, so avoid this nonsense at all costs.

Forex Q&A with Ed Ponsi

Forex Q&A with Ed Ponsi

By Ed Ponsi, FXEducator.com

Greetings from New York! We have a couple of great questions for you this week, so let's get started:

Q) Hi Ed, how long would you say it could take to go from stock trading to Forex trading? Can the same technical analysis be applied?

Ed Ponsi) Thank you for your email. If you are a stock trader and you're thinking about making a switch to Forex, I have great news! Everything that you already know about technical analysis applies to the Forex market. In the currency markets, we see the same double-tops, double-bottoms, head and shoulders, and other patterns that you are used to seeing in the equity markets. We use support and resistance in the same way that other traders do, and we use moving averages, MACD, average true range, and all of the other familiar indicators. Also, the currency markets feature strong trends which can last for years, so if you are a trend trader you will really enjoy trading Forex (see figure 1).


Figure 1: Long term trends are evident on the weekly chart of EUR/USD. Source: TradeStation

How long will it take to make the switch from stocks to Forex? That answer really depends on the individual, as it could take anywhere from a few days to a few months. I made the transition from stocks to Forex a few years ago, and at first I was hesitant. After all, there are two currencies involved in every currency trade; I can remember wondering if there would be two different prices on the chart! Of course, I learned later that there would only be one price – more accurately described as the exchange rate – on every Forex chart.

It took a while for me to realize that I needed to use longer time frames in Forex than I was previously using to trade stocks. This realization was a breakthrough in my transition process; if you are trading U.S. stocks, you have exactly 6 ½ hours per day to place trades, assuming that you are not trading the pre-market or post-market sessions. This causes traders to think in terms of shorter time frames, unless they are swing traders or position traders. Forex, on the other hand, is a 24-hour market, and although movement can be sudden and dramatic, most of the activity plays out over a longer period of time. Also, keep in mind that in the Forex market, we are not trading individual companies; instead, we are trading entire economies! The fortunes of any individual company can change dramatically in a relatively short period of time (Lehman Brothers, anyone?), but the world's major economies are massive compared to individual companies, and their fates change more slowly. This creates a huge advantage for Forex traders, and is the main reason why trends in the Forex market tend to be so dramatic and persistent. Many traders like to say, "The trend is your friend," but in the Forex market, we could say that the trend is your best friend. Good luck!

Q) Hi Ed, the question I wanted to ask you relates to the strength of Asian currencies in the near and distant future, and, in particular, the Chinese Yuan. Perhaps it is fair to say that, as the Pound was replaced by the U.S. Dollar some time ago and fell sharply over a number of years, then maybe we should prepare for what currency is likely to appreciate more in the long-term against the U.S. Dollar.

The Chinese currency is not free to trade at the moment, so the question is this: what is the best way to take advantage from the likely future appreciation of Asian currencies? Would the Singaporean Dollar and the Hong Kong Dollar be a partial answer? Thank you in advance for your help.

Ed Ponsi) Thank you for your question. If you are going to play the demise of the U.S. Dollar, you're going to need patience - although U.S. spending policies that have recently been enacted will serve to accelerate this process. As you mentioned, the reserve currency of the eighteenth and nineteenth centuries was without a doubt the British Pound. The GBP gradually ceded its throne to the greenback as the U.S. economy became the world's largest in the early twentieth century. The fall of the British Empire coincided with the collapse of the British Pound.

The most likely candidates to succeed the U.S. Dollar as the world's reserve currency are the Chinese Yuan and the Euro. China's economy will become the world's largest during the next ten to twenty years; meanwhile, countries such as Poland and Denmark may be drawn to the Euro as it has weathered the current economic storm in reasonably good shape - at least so far. Many pundits originally believed the European Monetary Union would fall apart when confronted with its first major crisis, but now other countries are accelerating their plans to adopt the single currency.

There is much to like about the Singapore Dollar (SGD). Singapore does not have a central bank; instead, its currency is managed by the Monetary Authority of Singapore. The MAS is seriously committed to low inflation, and unlike many central banks, it does not manage its monetary system via interest rates. Singapore is poised to benefit from the continuing explosion of growth in China.

Another long-term play on China's growth is the Hong Kong Dollar. The HKD trades within a narrow band vs. the U.S. Dollar, and it will be extremely difficult to maintain that band if the greenback falls apart. The HKD has traded between 7.75 and 7.85 vs. the USD for years. A sudden collapse in the USD could lead to a sudden and dramatic strengthening of the Hong Kong Dollar. Both the HKD and the SGD would be good candidates to include in a diversified currency portfolio designed to protect against weakness in the USD.

Did Someone Say "Carry Trade"?

Did Someone Say "Carry Trade"?
By Ed Ponsi, President, FXEducator.com

Greetings from New York! After another great trip to the U.K., it's good to be home in the U.S.

I received quite a few comments about last week's chart showing a massive double-bottom formation on the Australian Dollar/U.S. Dollar pair (AUD/USD). As it turns out, this formation is popping up in a number of pairs involving the Aussie and also the New Zealand Dollar (NZD). For instance, here is the same bullish pattern on the NZD/USD currency pair (see figure 1).

Figure 1: NZD/USD attempts to break out from a double-bottom formation. Source: Trade Station

Compare this chart to AUD/USD, and you'll see that the New Zealand Dollar is lagging behind its Aussie neighbor, falling short of the breakout point near .6000. Why is the "Kiwi" (so-called because of the picture of a kiwi bird on the New Zealand Dollar coin) having such a tough time in comparison to the AUD? Traders believe that New Zealand's central bank, the Reserve Bank of New Zealand, isn't finished cutting rates, and expect to see a 2.5% rate after the RBNZ's next meeting on April 30th. RBNZ Governor Alan Bollard recently said that the central bank is "projecting interest rates to remain at relatively low levels for an extended period," which also helps explain weakness in the Kiwi.

We haven't discussed carry trades in quite a while, but this strategy may be coming back into vogue. Many assume that carry trades must include a short position in the Japanese Yen, but this is not the case; any currency that possesses low interest rates becomes a viable shorting candidate for this trading strategy. Current interest rates reveal a number of excellent potential candidates among the majors:

Japanese Yen 0.10%; U.S. Dollar, Swiss Franc 0.25%; Canadian Dollar and Great Britain Pound 0.5%

And which of the major currencies have the highest rates, making them appropriate for the long side of the trade? Australian Dollar and New Zealand Dollar, both currently at 3%, are the highest yielding of the majors, but as we will see, there are other currencies that currently feature higher yields.

Regarding AUD/USD and NZD/USD, suffice it to say that U.S. rates have remained below Australian and New Zealand's rates for the past decade, and there is no scenario in which I can envision the U.S. Fed Funds rate exceeding the benchmark rates of those two countries. What about AUD/JPY and NZD/JPY? Those currency pairs are looking pretty bullish, sporting – you guessed it – double-bottom formations. Here is a look at AUD/JPY (see figure 2).

Figure 2: AUD/JPY breaks out of a bullish double-bottom formation. Source: Trade Station

A quick look at the daily chart of NZD/JPY reveals a very similar situation, as the pair also has broken out of a double-bottom formation. This trade also produces positive carry, as New Zealand's benchmark interest rate is higher than Japan's (see figure 3).

Figure 3: NZD/JPY daily chart reveals another successful double-bottom breakout. Source: Trade Station

One last piece of evidence that the carry trade has returned; an equally weighted basket of currencies consisting of Turkish Lira, Brazilian Real, Hungarian Forint, Indonesian Rupiah, South African Rand and Australian and New Zealand dollars – purchased with Japanese Yen, U.S. Dollars and Euros - earned an annualized 196% from March 2 to April 10. In other words, those taking the trade were long high-yielders such as the Brazilian Real and the South African Rand, and at the same time, they were short low-yielders like the Japanese Yen and U.S. Dollar, with the added diversification of using baskets instead of individual currencies. That same trade produced a 41% annualized loss from September, when Lehman collapsed, through February. Benchmark rates in those seven "long" economies range from a low of 3% in New Zealand and Australia to Brazil's astronomical 11.25%. Here is a three-year chart of these two baskets – it appears that a bottom may be forming (see figure 4).

Figure 4: A basket chart of high-yield vs. low yield currencies shows a bounce. Source: Bloomberg.com
Paradise? Not Really…

Fiji's central bank recently slashed the country's currency value to boost exports and tourism. The Reserve Bank of Fiji appointed Sada Reddy as the bank's new governor, one day after the former central bank governor was removed. Reddy immediately announced that the Fiji dollar was to be devalued by 20%, a decision that will probably send inflation soaring.

Fiji's international credit rating was downgraded last month from stable to negative, but the currency devaluation might drive tourists to the island paradise – assuming that their finances haven't been damaged by the current worldwide economic downturn. Thanks to the devaluation, the cost of a vacation to Fiji effectively drops by 20%. However, Fiji is currently run by a military regime, which is heavily censoring news and threatening to jail and deport journalists who report on political events there. Maybe it isn't such a great place to visit after all.
Comment of the Week

Q) I just read your email and I came across your article regarding the protests and the G20 summit. Well I though it was great; I am not sure whether you or a ghost writer wrote it, but it made sense to me. I think the problem with any country that has experienced wealth for too long takes what the previous generation did for granted. I am South African and it never ceases to amaze me how socialistic Britain has become, the Polish could teach them a thing or two about communism.

Ed Ponsi) Thank you for your email. No ghost writer here, just me. It seems that people everywhere forget the lessons of history, and those who forget history are doomed to repeat it. Poland has recent memories of Communist oppression, so they don't need to be reminded of the evils of that failed ideology. Meanwhile, in the U.S. and other fortunate countries, we seem to be wandering down the path of Communism, perhaps because we have no experiences that compare to those of Poland or other afflicted countries. There is an easy way and a hard way to learn anything, and I'm still hoping we in the U.S. can learn the easy way – through the experiences of others – as opposed to the hard way, where we repeat those experiences out of ignorance or foolishness.

My Name is Ed, and I’m a Capitalist

My Name is Ed, and I’m a Capitalist
By Ed Ponsi, FXEducator.com

Cheers from London! It's been an exciting week, complete with visiting dignitaries, rioting in the streets, and the cracking of a major terrorist plot right here in the U.K. I love it here in London, one of the greatest cities in the world, but all things considered, I'm ready to go home!
On the Steps of the Bank of England

On April 2, one day after the G20 riots in London, I made my way from my hotel to the headquarters of the Bank of England. On the previous day, at that same location, thousands of protesters clashed with police and vandalized a retail office of the Royal Bank of Scotland. When I arrived, a few hundred protesters remained, accompanied by nearly as many police. The walls of the BoE bore graffiti such as "Break the Bank" and "Fight Inflation, Eat the Rich." The protesters I spoke with were young, intelligent, and committed, and they truly seemed to believe that capitalism is the root of all evil. A young lady wore a shirt proclaiming her status as a "Free Range Human." One young man handed out flyers purporting to explain in a rational manner the evils of capitalism and extolling the virtues of communism and anarchy (does it really qualify as anarchy if someone is handing out flyers?). None of the protesters appeared to be over the age of 25.

As an unrepentant, lifelong capitalist, I was not upset that these folks were disparaging my way of life. These people were not evil, just misguided and inexperienced in the ways of the world. It's easy to be a committed anarchist when you're living in the basement of your parents' suburban home. These kids don't know that communism enslaves people into poverty, and that for many people around the world, capitalism represents the only hope of freedom. I would love for them to speak with one of the many thousands of people who risked their lives to escape communism for a chance at a better life.

I imagine that five years from now, many of those protesters will have children, and will need a place to call home. By then, I wonder how many of them will be seeking loans from – or even working for – the very banks that they now denounce and despise. Perhaps by tasting the rotten fruit of communism, these young lads and ladies will learn how morally bankrupt that failed system truly is. I imagine that down the line, some of them will become staunch free-marketers, once they have seen for themselves that despite its flaws and its wounded reputation, capitalism still is the greatest economic system on earth.
For Those About To Rock

When the global downturn hit, the prices of commodities such as gold, copper, and other base metals were crushed, and commodity currencies such as the Australian Dollar were hammered right along with them. Now that some analysts claim to see the first "green shoots" of economic recovery, will demand for those metals rise again? Let's connect the dots; a strengthening world economy should lead to increased construction, especially in China. This would in turn lead to increased demand for base metals, a crucial construction component and a major export of Australia. As demand increases for Australia's exports, the economy down under should kick into gear, thereby justifying a rise in the Aussie currency.

While economic figures remain grim, markets do not necessarily reflect the current environment; many analysts believe that markets are predictive, and any improvement in the economy will be foreshadowed by the markets prior to its actual occurrence. With that in mind, it's interesting to note that the Australian Dollar has formed a rather massive double-bottom formation, a possible indication of better things to come (see figure 1).

Figure 1: AUD/USD weekly chart shows a bullish double-bottom formation. Source: Trade Station

Whether or not the AUD/USD pair can break out of this formation is not the issue, in my opinion. Even if Aussie pulls back to the area below .6500, there could be limited downside risk because Australia's central bank, the Reserve Bank of Australia, has openly admitted to boosting the currency several times when it reached that area in late 2008. The RBA is committed to preventing the Aussie from tumbling below .6000, after nearly reaching parity vs. the USD last summer. Also, this trade currently has positive carry (meaning that traders can collect interest, similar to a stock dividend except currency traders collect it every day) because Australia's benchmark interest rate, currently 3.25%, is higher than the U.S. Fed Funds rate of 0.25%. So, traders who are long Aussie vs. the greenback can capture interest in addition to any appreciation they might receive from the trade. This would certainly be a long-term trade with very wide targets and stops (ideally beneath .6000), but the upside potential is huge – potentially back to last year's high near .9850 – and there is little nearby resistance if the double-top can be completed.
Question of the Week

Q) Just read your article on the Reserve Currency Debate and had a general question. If in fact that proposal would go through for a super currency and all nations would be on board, what would happen to the Forex market, would it still be there?

Ed Ponsi) Thank you for your question. Yes, the U.S. Dollar would still exist, along with the Euro, the British Pound, and all of the familiar currencies, but the USD would be supplanted as the reserve currency of the world. This might not occur by official decree but over a period of time; for example, at one time the British Pound was the world's reserve currency. The greenback did not suddenly replace the Pound Sterling; it was a gradual process that occurred over a period of years. Likewise, there was a time when the sun never set on the British Empire. Empires rise and fall, and the British Empire was no exception. In my opinion, the reserve currency issue is about more than money, it is a question of economic power and influence: Will America remain a powerful and influential nation in the future, or will the U.S. choose to let her economic empire fall?

The Reserve Currency Debate

The Reserve Currency Debate

By Ed Ponsi, President of FXEducator.com

Greetings from London! The Group of Twenty (G20) meeting is in full force just a few miles away, and the world is waiting to see if world leaders can come to a consensus on how to deal with the financial crisis. Some feel that at least part of the problem lies in the U.S. Dollar's status as the world's reserve currency. Lately there has been much talk about shifting the world's reserve currency away from the U.S. Dollar and toward a so-called "super currency."

First of all, what is a reserve currency? Reserve currencies are held by governments and institutions outside the country of issue and are used to finance international economic transactions, including trade and the payment of debts. A country might stockpile U.S. Dollars in case they may want to sell them and purchase their own currency, in order to boost the exchange rate. This is known as intervention, and it has happened recently in Australia, Brazil, and Mexico, among other places. Another reason to keep a supply of USD handy is because key commodities, such as oil and gold, are priced in U.S. Dollars.

Why do countries want to replace the U.S. Dollar as the world's reserve currency? If the U.S. Dollar becomes volatile, as it has recently, this can cause large swings in the value of financial holdings outside the U.S. A strong dollar makes it much more difficult for entities outside the U.S. to pay back loans that are denominated in USD. Critics also say that the United States enjoys an unfair benefit as the printer of the world's premier reserve currency.

And of course, haters like Venezuela's Hugo Chavez and Iran's Mahmoud Ahmadinejad would love to see the U.S. lose the prestige and influence that comes with possessing the world's reserve currency. "Soon we will not talk about dollars because the dollar is falling in value and the empire of the dollar is crashing," said Chavez on November 19, 2007. "Naturally, with the crash of the dollar, America's empire will crash." Ahmadinejad has led the charge for OPEC nations to price oil in currencies other than the U.S. Dollar, which he refers to as a "worthless piece of paper."

Please understand that any shift away from the USD toward either the Euro or a "super currency" would be devastating for the U.S. Dollar. To illustrate this, please consider the events of March 25, 2009. On that day, Treasury Secretary Timothy Geithner responded to a question from a reporter. The reporter asked Geithner for his thoughts about the proposal by the governor of China's central bank to replace the dollar with a new global reserve currency. Here is Geithner's reply:

"We're actually quite open to that suggestion – you should see it as rather evolutionary, rather building on the current architecture rather than moving us to global monetary union," he said. As word of these remarks reached traders, the greenback abruptly lost 180 pips to the Euro in just eight minutes, and suffered a similar plunge against other currencies (see figure 1).

Figure 1: Euro rockets higher vs. USD on 1-minute chart, and then reverses. Source: Trade Station

A few minutes later, Geithner furiously backpedaled on his comments by saying that there is "no change in dollar as world's reserve currency and likely to remain so for long time." As those words crossed the newswire, the buck reversed course and gained back most of the ground lost just minutes earlier.

I think Geithner is a bright guy, but am I the only one who is growing tired of his on the job training? For years, the U.S. Treasury Secretary has repeated one mantra, over and over. Here it is: "A strong dollar policy is in the best interests of the U.S." That's it. Mr. Geithner should commit those words to memory.

The scary part is that his comments seem very well thought out and articulate, so I don't think it was a gaffe. What if in his heart of hearts, his initial comments reflect his true feelings on the subject? What if he really believes that the USD should be replaced as the world's reserve currency, that such a move would be "evolutionary" as he put it? What sort of an impact would that have on the U.S. Dollar? Consider the damage that Mr. Geithner was able to do in eight minutes, and now imagine if that policy – to which he says he is "quite open" - was actually implemented. How far would the U.S. Dollar fall in eight days, in eight months, or in eight years? One can only hope that we never find out.

So what is this so called "super currency" that would replace the U.S. Dollar as the world's reserve currency if China and Geithner have their way? The likely choice would be an SDR. In 1969, the International Monetary Fund (IMF) created an international reserve currency called a Special Drawing Right, or SDR. An SDR is not an actual currency, but an artificial currency that is really created from a basket of currencies. That basket consists of the Euro, Japanese Yen, British Pound, and U.S. Dollar.

We in the U.S. take it for granted that the Dollar is the dominant currency of the world, but this was not always the case – the Great Britain Pound once held the title as the world's reserve currency. The U.S. Dollar was not always the reserve currency, and it will not remain the reserve currency of the world if we allow it to fall. Please keep in mind that the actions we take today have consequences for the future.


Ed Ponsi

Forex Q&A with Ed Ponsi

Forex Q&A with Ed Ponsi

By Ed Ponsi, President, FXEducator.com

Greetings from New York! I'd like to thank everyone for all of your great questions. Let's get started!

Q) Hi Ed, I really enjoy your column. Could you please explain the rally in the Euro after the recent FOMC meeting?

Ed Ponsi) Thank you for your email. The Federal Open Market Committee (FOMC) created quite a stir when they announced they would begin purchasing massive amounts of U.S. Treasuries. This is not very different from recent announcements made by Great Britain (please see "It's Not That Complicated") and Switzerland (please see last week's article, "Swiss Franc Goes Ballistic"). EUR/USD shot higher in response to this announcement, gaining nearly 400 pips in just a few hours (see figure 1).

Figure 1: Euro crushes the U.S. Dollar after the FOMC announcement on March 18. Source: TradeStation

Since the Fed plans to print the money used to buy the bonds, the USD fell due to the anticipated dilution of the greenback. After a recent announcement by the Bank of England, the British Pound slid by about 600 pips vs. the U.S. Dollar. Also prior to the Fed announcement, the Swiss Franc (CHF) lost nearly 400 pips vs. USD in just one hour on a similar announcement from the Swiss National Bank.

It seems that whenever a central bank announces they are about to fire up the printing presses, that currency falls. So which shoe will be the next to drop? So far, Europe has resisted the rush to print money, and the Euro has looked pretty stout recently, especially against the Yen and the British Pound. But on March 24, European Central Bank (ECB) Vice President Lucas Papademos said the bank could consider quantitative easing if all other options to revive the economy have been exhausted. Traders will be watching the news closely to see if the ECB joins the printing press parade, a move that could create a sudden down draft in the EUR.

Q) Hey Ed, maybe you can help me out with this question/comment. You and everyone else keep mentioning this enormous national debt that keeps on growing and growing. Is it really that big? It seems like if you take the total value of all the assets in this country, it would be well into the hundreds of trillions of dollars. Why are we so concerned having a debt level that is equal to probably 1% or 2% or less of total assets? I guess I'm on an island all by myself here but I don't see this debt being a serious problem down the line based on the ratio of the debt to total assets of all citizens in the country. What am I missing? If the U.S. were a corporation we would be talking about their phenomenal debt to asset ratio. Why is it so different - because it's a nation and not a corporation? I guess what I'm asking is why is a debt/asset ratio of 1-2% considered such a serious problem for a nation...yet considered great business practice for corporations? Thanks for the help. Keep up the great work.

Ed Ponsi) Thank you for your email, it's a great question. The first point I'd like to make is that generally speaking, companies borrow money to make more money; for example, if you borrow money to build a factory, you certainly intend to make enough money to pay back that loan many times over. I'd call that a good debt. But how would you feel about a company if it had to constantly borrow money just to meet its payroll and pay for employee pensions and healthcare? What if that company needed to borrow more money just to pay the interest on its outstanding debts? You probably wouldn't want to own stock in that company.

Also, while companies are expected to adhere to strict accounting rules, the financial statements the Federal government releases are held to a much lower standard. Government debt statistics do not include the amounts it expects to pay in the future for the Social Security, health care programs, and various other obligations, like publicly held debt, military and civilian pensions, Federal insurance, loan guarantees and leases.

So how big is the real U.S. debt? It depends who you ask. The National Debt Clock currently shows a liability of over $11 Trillion USD, a number that is compiled from figures given by the U.S. Treasury Department. But remember, some of the biggest liabilities are left unmentioned in official government statistics. According to David M. Walker, the former Comptroller General of the United States, the actual number is much higher – about $52.7 Trillion USD. This represents the equivalent of $175,000 per person living in the United States, or $410,000 per full-time worker. The really bad news is, Walker's $52.7 Trillion figure is as of 2007 – in other words, it was calculated prior to the massive spending orgy we are about to undertake. For the very first time, a single-year Federal budget will increase the overall debt by trillions of dollars. We are already in deep, and we are digging the hole much faster now.
Chuck Is Back!

Sorry to bum you out with all that talk about debt. Here are a few Chuck-isms to brighten your day:

Chuck Norris' options expire from sheer terror.

When your platform goes down, it's because Chuck Norris punched it in the face.

Chuck Norris' calendar goes straight from March 31st to April 2nd; no one fools Chuck Norris.

Ed Ponsi on Forex TV

Here is the link to today's ForexTV appearance. We covered EVERYTHING!

This link should work for about a week.

It's Not That Complicated

It's Not That Complicated
By Ed Ponsi, FXEducator.com

Why does the British Pound continue to slide? The continuous downward trend is pretty obvious, but why? The British Pound has been falling hard vs. the U.S. Dollar for months, and bargain hunters trying to "buy low" have been slammed repeatedly. Note that since late 2007, the GBP/USD exchange rate has fallen by more than 7000 pips. The pair has remained trapped beneath its 10-week Exponential Moving Average since August (see figure 1).

Figure 1: GBP/USD has been in a downward spiral since late 2007. Source: Trade Station

Even after this crushing move, sentiment toward the British Pound remains negative. Sure, the U.K. economy is in trouble, but that is not a unique problem. Now, the British government is preparing to unleash a flood of cash in a bid to restart the economy. The Bank of England has announced that they are about to embark on quantitative easing, a strategy designed to relieve stress on the credit markets and fire up the economy. The Bank of England (BoE) has just committed to a 75 billion Pound asset buying spree designed to do just that.

Quantitative easing may sound complicated, but it's really very simple. The BoE will "print money" and use it to buy "gilts," a slang term for U.K. government bonds. Although quantitative easing is often described as "printing money," no new notes and coins are actually created. Instead, a central bank "creates" more money on its balance sheet, and then uses that money to buy the assets of commercial banks, such as home loans and government bonds, thereby pumping extra cash into the system. The commercial banks have accounts with the central bank, and the money will simply be credited to those accounts. One could say that the new funds are created electronically, rather than physically.

When a central bank floods the banking system with masses of money to shore up financial systems and promote lending, it is known as quantitative easing. The hope is that when the banks are flush with cash, they will lend some of that money out to businesses and consumers, who will continue to circulate the money, thus boosting the economy. The problem is, such a tactic can dilute the currency, and the perception that such dilution is about to occur is dragging the Pound down right now.
Question of the Week

Q) I recall you saying on one occasion that during the non farm labor report, stops are not guaranteed. So I phoned my broker and posed the question to him. He said that stops are never guaranteed. Do any Forex companies guarantee their customers' stops? I know there are companies that guarantee no negative account balance.

Ed Ponsi) Thank you for your questions. I'm not surprised that an employee of a specific broker has not heard of guaranteed stop losses, because many companies do not offer them, but they do indeed exist. These orders are referred to as GSLO's (Guaranteed Stop Loss Orders), although entries and exits can also be guaranteed under some circumstances. A common GSLO might guarantee your protective stop up to a certain size of trade, such as 20 standard lots. These orders provide an extra layer of security for traders who are concerned about gaps. For example, assume that a EUR/USD trader places a stop on a Friday afternoon at 1.2600. If EUR/USD closes on Friday at 1.2620, and opens on Sunday evening at 1.2580, a person who placed a GSLO at 1.2600 will have his or her order filled at exactly 1.2600. Not all brokers offer this feature, and some actually charge the client to use a GSLO, so check with your individual broker for details.

How can brokers afford to offer this type of protective stop? Compared to the equity markets, gaps are relatively rare and benign in the Forex market (although recent high volatility has caused an increase in the size of these gaps). There are two main reasons for this; first, the tremendous liquidity of the Forex markets (estimated at about $3.2 Trillion USD per day) means that there are available buyers and sellers at virtually every price point. The other reason is the lack of opening gaps, which only occur on the weekends due to the 24-hour, round-the-clock nature of the currency markets. In conclusion, gaps do occur in the Forex market, but traders can avoid them by using a GSLO or by closing all positions entirely prior to the weekend.

Regarding a guarantee that your account balance will not turn negative, this is pretty much standard operating procedure in the Forex world. Stock brokerages tend to close positions manually, whereas Forex brokers execute them automatically. Unlike the stock brokerage model, where a trader who fails to use good risk management could possibly lose a sum greater than the amount invested, most Forex accounts will automatically close out positions before the account equity turns negative. This is reflective of a superior use of technology by currency brokers; since they are newer than most stock brokerages, they did not suffer from antiquated procedures (such as literally calling a client who has received a margin call).

Also, the international nature of the Forex market would make it difficult and time consuming for creditors to chase debtors. For example, suppose a broker is located in Switzerland, and a client of the broker lives in Costa Rica. If the trader in Costa Rica fails to send funds owed to the broker in Switzerland, the broker may find it difficult to collect that money. In fact, that Swiss broker may have clients in 100 different countries, and the time and effort involved in chasing them around the world to collect funds would be too great. This is why many Forex brokers will automatically close trades before all of the funds are drained from an account.

Yen Suddenly Not So Tough

Yen Suddenly Not So Tough
By Ed Ponsi, President of FXEducator.com

In last week's article, we took a close look at the Japanese Yen currency pairs, specifically at two setups; a double-bottom pattern on USD/JPY's daily chart, and an inverted head and shoulders pattern on GBP/JPY. Well, one week later, USD/JPY has soared by 400 pips in a relentless move higher, as the greenback finally gained the upper hand over the Yen (see figure 1).

Figure 1 USD/JPY blasts higher after forming a double-bottom pattern. Source: Trade Station

The greenback continues to be the currency that is perceived to be the safest in this maelstrom, which is really not saying much. In a country like Mexico where the Peso has collapsed, the buck is an obvious choice for storing wealth, and residents are fleeing the local currency. On March 4, Vladimir Putin felt the need to reassure the world that Russia's Ruble is not about to collapse. Considering the damage to the Ruble, the Peso, and other troubled currencies, it's easy to see why the USD seems like a good place to stash your cash. But while USD/JPY is reaching its highest point since November, GBP/JPY has struggled mightily as it attempts to break out of a bullish inverted head and shoulders pattern (see figure 2).

Figure 2: GBP/JPY is tries to break out of an inverted head and shoulders pattern. Source: Trade Station

As you can see, GBP is locked into a life and death struggle with JPY in the area near 140.00. Why would the GBP have so much difficulty working its way higher vs. JPY while the greenback cruises into the stratosphere? In a word, the answer is sentiment. Over the past six months or so, the British Pound has been the currency market's version of the 0-16 Detroit Lions, a currency unable to get out of its own way. However, unlike the stock of Citigroup or AIG, there is no threat of the GBP going to zero. GBP is probably undervalued on a fundamental basis here, but until this currency can show some sustained strength, there is no good reason to buy the Pound.
Question of the Week

Q) Hello Ed, first of all, your articles are very good, I may say even illuminating and I enjoy reading them. I intend to enter the Forex market and I am interested in your opinion on extremely long-term Forex pair trading. I am referring to the major pair combinations of EUR/GBP/USD/CAD/CHF/AUD/NZD. Long term for me is in monthly charts and entering trades with periods of month or even years (where the weekly and daily charts are used for fine tuning the entries/exits).

From back testing all these pairs I observed that during the last 10 years, I got between 4 to 8 trades per pair using a relative simple technique. The testing also showed that I have no need to be glued to the computer and I can pursue other activities as well. The profits also seem to be solid, my only issue is the relative large stop-loss needed and here I will appreciate your input - what stop-loss size would you recommend?

Ed Ponsi) Thank you for your email and your kind comments. It's refreshing to hear from someone who is looking at the market from a different perspective, in this case a very long-term one. And I thought I was a long-term trader! Although I've never traded off of the monthly chart, I do use the daily and weekly time frames frequently. I agree that using longer time frames allows a trader to have the freedom to pursue all kinds of worthwhile activities, and though we sometimes may lose sight of this, didn't we all get involved with trading so that we could enjoy more freedom? I think that most traders would list freedom as the number one reason for pursing this career in the first place.

Now to the specifics of your strategy; it's true that as a long-term trader, you'll need to use wide stops and targets. Fortunately, this doesn't necessarily mean that you'll have to risk large sums of money on every trade; instead, you have the option of trading fewer lots, mini lots, or even micro lots if necessary. For example, in a mini account, a one-lot EUR/USD trade using a 500 pip stop equates to a maximum potential loss of $500; in a micro account, a one-lot trade on EUR/USD with a stop that is 500 pips away from your entry point creates a risk of only $50! With this kind of flexibility, you can certainly use longer time frames without incurring the risk of a major blowout.

We really can't say that the strategy is complete or profitable until you've determined a method for placing the stop; after all, risk management is the most important part of any strategy. Without understanding the strategy's specifics, I can't really tell you how far away to place the stop as I have no real understanding of your methodology, or other important information such as the profit objective. You'll need to add specific rules for stop placement to complete the strategy, and then test it, before you can know if it really is a profitable strategy. Good luck!


Ed Ponsi

A Ray of Hope for Stocks?

A Ray of Hope for Stocks?
By Ed Ponsi, FXEducator.com

Since the middle of last summer, one of the most reliable currency trades has been to short GBP/JPY, EUR/JPY, and/or USD/JPY on rallies. These currency pairs have had a strong correlation to the equity markets since the early part of what we used to call the "subprime mess," so as stocks fell, these pairs fell along with them. But now we are seeing this correlation fall apart, at least temporarily. As the stock market continues to plunge, reaching depths not seen since the 1990's, several currencies pairs that feature the Japanese Yen appear to be staging reversals. In fact, GBP/JPY appears to be forming an inverted head and shoulders, a bullish formation, despite the recent setbacks in the stock market (see figure 1).

Figure 1: GBP/JPY forms a bullish inverted head and shoulders formation. Source: Saxo Bank

At the same time, USD/JPY also appears to be forming a bullish reversal pattern; in this case, the pattern takes the form of a double-bottom. In fact, USD/JPY has passed beyond the breakout point and has climbed above 95.00, a level not seen since November of last year (see figure 2).

Figure 2: USD/JPY breaks out of a bullish double bottom pattern. Source: Saxo Bank

Undoubtedly, this scenario will lead to the following question: since the equity markets fell along with the GBP/JPY and USD/JPY currency pairs, does a reversal in those pairs foretell a similar reversal of fortune for U.S. and world stock markets? I wish that I could tell you for certain that this is the case. On the one hand, one can't deny that a strong relationship exists between the JPY and equities. This has been a bread and butter trade for a long time, and something I've written about frequently in this column (see last week's article, "Using Inter-Market Analysis to Trade Forex" and last October's "Using Stocks to Trade Forex"). But that doesn't give me the right to ignore the possibility that the market may be changing, as constant change is a hallmark of all trading markets (and the anathema of back testers everywhere).

On the other hand, correlation is not causality; in other words, just because the JPY pairs and stocks fell together, this doesn't mean that they have to rise together. If I scratch my nose and it begins to rain, those two events are a coincidence; yet a child or a primitive man might believe that he caused it to rain by scratching his nose, leading to elaborate nose-scratching rituals in an attempt to duplicate the earlier result. In other words, two things can happen at the same time despite the lack of any relationship between the two. Correlations come and go, new ones are born and old ones fade away all the time. If the same correlations remained intact on a constant basis, our jobs as traders would be much easier. Constant change keeps traders on their toes, and the ones who can adapt quickly tend to do well.

One thing that is disturbing to me about the recent push to new depths in the stock markets is that there seems to be a complete lack of panic. Major lows are often accompanied by panic selling, but there has been no hint of indiscriminate dumping of stocks as of this writing. We have not seen a spike in the Volatility Index or VIX, which would indicate a high level of emotion in the markets. If there are buyers lurking, they might be waiting for just such a sign. It's likely that many long-term traders are "keeping their powder dry," waiting for panic selling as their indicator to initiate long positions.
Question of the Week

It seems that our discussion of mini and micro lots created a big response, so I'd like to handle a question on that topic.

Q) Hi Ed, how many lots can I trade in the Forex with $5000? There are so many factors to consider. Would you be kind enough as to give me some pointers as what to look for or avoid? A little advice would go a long way right now. Thank you in advance, Cindy.

Ed Ponsi) Thank you for your question, the number of lots you can trade with $5000 depends on the account type. In a standard account, you must put up margin collateral of $1000 to enter a one-lot trade; this would be highly unadvisable because just a one-lot trade would use up 20% of your buying power. This means that your flexibility would be severely limited, especially when faced with multi-lot scenarios. Many traders prefer multiple lots because it allows them to exit a portion of their trade at a profit while allowing another portion of the trade to run.

However, the requirement to enter a trade in a mini account is only $100, and in a micro account the requirement is only $10. The temptation is to worry about the fact that it will be difficult to make a large sum of money under these circumstances, but that is putting the cart before the horse. Instead of thinking about money, consider opening a mini or micro account with the intention of mastering the skill of trading. In a smaller account, this can be done with a minimum of risk, if good techniques are applied. Once you have learned proper technique and risk management, you can always scale your trades to a larger size. The mistake some people make is that they are too blinded by greed and are in too big of a hurry to make money, so they skip training and dive right in to large sized trades, with negative results. Meanwhile, traders who study hard and risk little while they learn are giving themselves a chance for success.


Ed Ponsi

Using Inter-Market Analysis to Trade Forex

Using Inter-Market Analysis to Trade Forex
By Ed Ponsi, President of FXEducator.com

Many regular readers of this column know that I sometimes use cross-market analysis to find Forex trades. If you think that sounds complicated, keep reading and you'll see that it's easier than it sounds. You might recall last October's article, "Using Stocks to Trade Forex," where the S&P was used as an indicator to trade the GBP/JPY currency pair. Recently, a trade setup presented itself where I was able to use a major support level on the S&P 500 as an indicator to place a trade on another currency pair that is known to follow that index.

Let's begin with a very long-term look at the S&P 500; we can do this by checking the continuous monthly chart of the E-Mini futures contract. From this chart, it's very clear that the 800 area acted as support and helped form the bottom during the bear market of 2001-2002, and was re-tested early in 2003. That same level and the area just below it has been tested repeatedly during our current bear market, during both 2008 and 2009 (see figure 1).

Figure 1: S&P 500 monthly chart returns to test major support near the 800 level. Source: Saxo Bank

There are certain currency pairs that have a strong correlation to the equity markets; in other words, when the stock market goes down, these currency pairs go down with it, and when the market rises, it pulls these currency pairs up in its wake. This relationship exists across many currency pairs that include the Japanese Yen, such as GBP/JPY and EUR/JPY, and after considering a variety of alternatives, a plan began to form. The general idea was this; if the S&P 500 bounces off of that support level, then the JPY pairs should bounce as well. We would wait for the S&P 500 to drop below 800, and then if it rebounded above that level, we would go long EUR/JPY. That is exactly what occurred on the morning of February 17, 2009. This occurred just before 10 am New York time, about one half hour into trading. That time of day is infamous for reversals in U.S. stocks, and since we were trading a currency pair that mirrored the action in the equity markets, we were counting on a similar reversal in EUR/JPY.

Figure 2: EUR/JPY climbs to first target, then falls back to break even. Source: Saxo Bank

After entering the trade, the EUR/JPY floated back and forth, just drifting sideways. What happened? The S&P 500 failed to hold above 800, but it wouldn't fall back either, treading water above 790. Finally, after lunch, stocks mounted enough of a rally to pull EUR/JPY up to our first target, and after all that time we were happy to ring the register with half of the trade. Following our plan, we raised the stop on the remainder of our trade to our entry point – the breakeven point - and let the rest of the trade run. This would guarantee a worst case scenario of a profit on the first half of the trade, and a break even trade on the second half.

We had locked in a winner, but a bigger bounce never materialized, and the S&P sank into the close. This pulled EUR/JPY back down to our entry point, where the second half of the trade was closed for a breakeven trade. While the result wasn't everything we had hoped for, we did well – the trade was not a home run, but not a strikeout either. The important thing was that we were able to lock in a profit and at the same time give our winner a chance to run. Experience teaches us that if traders keep doing the right things, like eliminating risk, locking in profits and letting winners run, then good things can happen.
Question of the Week

Q) I have recently decided against trading on Fridays, because the strategies that are so effective during the week seem to fail me miserably on Fridays and I end up losing money. Is there any advice you can give on successful Friday trading? Thanks.

Ed Ponsi) Thank you for your question, it's good that you're paying attention to important patterns in your trading. There is nothing wrong with trading on Fridays per se, but we need to pay attention to the time of day – not just where we are located, but everywhere. I'll give you an example; let's assume you are trading in New York. When it's 10 am in New York on a Friday, it might not be a bad time to trade because London traders are still active. London is five hours ahead of New York, so when it is 10 am in New York, it is 3 pm in London – still a few hours of good trading remain from the world's capital of Forex trading (London is responsible for about one third of all Forex volume).

But what if the time is 2 pm on a Friday in New York? Well, that would mean that the time is 7pm in London, and those traders have closed up shop for the week. Also, when it is 2 pm on Friday in New York, it is already Saturday morning in Asia, so we can't expect any volume from that part of the world. You might notice that as Friday wears on, intraday candles have a tendency to get smaller and smaller. When I worked as an equity trader, we would close our positions and take off every Friday afternoon between Memorial Day and Labor Day, due to low volume and a lack of interest on the part of many market participants. The idea was that you could either keep trading a market that won't move and bang your head against the wall, or you could preserve your capital and find a more useful way to spend your time. A low volatility market can be frustrating, so if you sense that the keg is kicked and the party is over, there is nothing wrong with closing out your short-term positions and walking away.

Is Forex Trading a Zero-Sum Game?

Is Forex Trading a Zero-Sum Game?

By Ed Ponsi, President, FXEducator.com

Q) Hi Ed, I really enjoy your column every week. I have a question; I sometimes hear trading referred to as a zero-sum game. Could you please explain this, what does it mean?

Ed Ponsi) Thank you for your question. There is a misconception among some traders that every trade must have a winner and a loser. There is a great deal of misinformation out there, and there have even been books published recently that incorrectly state that Forex trading is a zero-sum game. In order to clear up the confusion created by these inaccuracies, let's first understand the meaning of that phrase.

Suppose you place a friendly bet with an acquaintance on the outcome of a football match. Each of you puts up an equal amount of money, let's say $100, and at the end of the game, one of you will walk away with $200 and the other will be $100 poorer. That is a zero-sum game in its purist sense; unless the game ends in a tie, there will be one winner and one loser, end of story.

Now let's apply this concept to the currency market; suppose you enter a long position on EUR/USD and at the same time, another trader takes a short position in the same currency pair. The broker simply matches the orders and collects the spread. This is exactly what the broker wants, to keep the entire spread and maintain a flat position.

Does this mean that in the above scenario one party has to win, and one must lose? Not at all, in fact both traders can win or lose; perhaps one has entered a short-term trade and the other has entered a long-term trade. Perhaps the first trader will take a profit quickly, but there is no rule that states the second trader must close his trade at the same time. Later in the day, the price reverses, and the second trader takes his profit as well. In this scenario, the broker made money (on the spread) and both traders did, too. This destroys the oft-repeated fallacy that every Forex trade is a zero-sum game.

By the way, stock trading is not a zero-sum game either. Suppose you buy 100 shares of XYZ at $40, and sell it at $50. Another trader buys it from you at $50 and sells it at $60. Yet another trader buys it at $60 and sells it at $70. Which trader lost money? None of them did, they all made $10 per share. What about traders who are short XYZ? There is no rule that states that anyone has to short XYZ stock, and it is highly unlikely that there are as many shorts as there are longs, or more precisely, that there are as many shares sold short as there are purchased long.

What type of trade can be accurately called a zero-sum game? Options come to mind; suppose you purchase some XYZ call options, where did they come from? In order for you to purchase those calls, someone else has to sell or "write" them. If the price of XYZ stock reaches the strike price and beyond, the buyer wins, and if it fails to do so, the seller wins. While this represents a true zero-sum game, it is clear that this situation is the exception, not the rule. Trading can be a zero-sum game, but that isn't always the case. I just wish people would think about these things a bit more deeply before they state or write that trading is a zero-sum game.

Q) Hi Ed, I very much enjoyed your comments in Micro FX accounts (read the comments here). I have recently been through exactly the same thought process, and an additional argument I made to myself was that with a micro account I can trade, say, 10 micro-lots (instead of 1 mini lot) which would allow me close half my position at a pre-determined profit target and let the rest run.

Follow-up question if you don't mind. There has been much talk amongst my fellow traders of the virtues of trading FX directly (through an ECN perhaps?) or using the broker as the counter-party. I'm guessing that the broker is the counter-party on all Micro accounts. Do you have a view on the pros and cons or do you know where I can find a considered opinion? Thank you as ever for your great articles.

Ed Ponsi) Thank you for your question, you are right on the money concerning mini and micro lots. Consider the above scenario where the broker matches the orders of two traders who take simultaneous opposing positions. The broker gets to keep the spread while remaining flat; this is a risk-free position for the broker. In the Forex market, most brokers have their own proprietary platform, and therefore can collect the spread (or at least a portion of it) on all of the trades that pass through their platform. In a sense, you could say that each Forex broker has their own little monopoly, and it's not surprising that they like it that way.

What about an ECN-style Forex broker? ECN stands for Electronic Communications Network, and it would give Forex traders a portal by which they could enter trades alongside the "big boys." An ECN for Forex traders would be fantastic for traders, and there is nothing I'd rather see than all of the big Forex brokers jockeying for position in a Level 2 style environment. The problem is, there is no incentive for the brokers to give up their own little fiefdoms. While the ECN model has been tried, it has never really succeeded – at least not yet. It won't work unless most or all of the big Forex names decide to participate, so while I would love to see it happen, I'm not holding my breath.

Is the Dollar Doomed?

Is the Dollar Doomed?

By Ed Ponsi, President, FXEducator.com

Q) Hi Ed, I read your Forex articles and find them very informative and interesting. I have one question or concern which I hope you could address concerning U.S. Treasuries and the flight to safety we have seen lately. As most of the G8 countries are now in official recessions, investors have been flocking to U.S. Treasuries as a "safe haven", thus driving up the U.S. dollar. I don't see the reason. My belief is that U.S. Treasuries are not safe. With trillions outstanding, I don't see how the U.S. government plans on repaying these securities. We all realize from the times we live in, that the intrinsic value of paper money is zero!

Ed Ponsi) Thank you for your email. You're right; the current rally in the U.S. Dollar is an artificial rally in my opinion. The greenback is not strong because it is a good currency, but because it is considered a safe port in what is turning out to be a really bad storm. Currencies and governments around the world are on the verge of collapse. Just imagine if your wealth was tied up in Russian Rubles, Mexican Pesos, or Iceland Kronas; you would do everything you could to reduce exposure to your damaged currency and put it in a more stable currency, such as the USD. U.S. Treasuries are considered safe, at least for the time being, since they are backed by the full faith and credit of the U.S. government. There may come a day when the USD collapses, due to failure to pay our huge debts and an increase in the money supply, but that is not likely to happen right now. Meanwhile, it is happening right now in other countries around the world.

For example, in a recent newsletter, titled "The Ruble is Rubble", I mentioned that the collapse of that currency was accelerating, as USD/RUB shot past the 31.00 handle; well, a few weeks later, we are testing 36.00, which just happens to be the level that the Russian government claimed they would defend. Well, they asked for it, and traders obliged by pushing right to 36! (See figure 1).


Figure 1: USD/RUB skyrockets as Russia devalues its currency. Source: Saxo Bank

Looking at that chart, I'm just glad that I'm not holding Rubles! Now check out this quote, attributed to a senior Icelandic official: "The Krona is dead. We need a new currency." That comment pretty much says it all, as Iceland's currency and government have both collapsed. Could Mexico be following in Iceland's footsteps? The Peso is getting clobbered by the greenback, recently breaking out of a massive ascending triangle pattern on the daily chart (see figure 2).


Figure 2: USD/MXN breaks out of a bullish ascending triangle pattern. Source: Saxo Bank

All of this mayhem is currently causing the USD to strengthen, but be careful; U.S. bailouts will likely cause the greenback to weaken in the long run, due to excessive borrowing and, most likely, excessive printing of dollars. The buck can't cheat reality forever, and at some point, when the current fears subside, the bill will come due. Gold is already looking pretty stout compared to most commodities, recently trading above $900 per ounce; could this be in anticipation of future USD weakness? That's a possibility we can't ignore.

Q) Hi Ed, I wonder if you can help. I am trading a rather small account for two weeks now – but I have no confidence and stress is my enemy. I am trying everything – even scalping, and maybe this is what got me scared. How can I conquer this – what could help? Maybe there is a way to decrease the stress, where psychological burden is not so big. Cheers, Adam

Ed Ponsi) Thank you for your question. Stress is a huge problem for traders, but there are effective ways to deal with it. When I started trading I was constantly stressed out, because I didn't have a plan – I'd just enter trades when it seemed like a good idea, and then monitor the trade constantly for signs as to whether I should stay in or get out. This seemed like reasonable behavior at the time, but now when I look back I can see that I was "winging it". Somewhere along the way, it sunk in that I had to have a definite plan for every trade. Now, before I enter any trade, I have to give exact answers to these questions:

Where is my entry point?

Where will I place the stop?

At what point will I move the stop? Where will the stop be located then?

Where is my exit (unless the exit is to be achieved through a trailing stop)? Should I use more than one exit? Where exactly will they be located?

Stress is created when we don't know what we're going to do next. If you are "flying by the seat of your pants" you will be constantly monitoring every tick, searching for a sign to determine your next move. But if you've already decided every possible move that you can make – in other words, if you've already completed the decision making process before entering the trade – the stress melts away. We can't force the market to move the way we would like, so don't worry about that; instead, we concern ourselves with the things we can control, such as creating and executing a good trading plan. This is one of the most important habits you can develop to be a successful trader, and you'll feel better too. Good luck!

Beat Down on the Pound

Beat Down on the Pound

By Ed Ponsi, Fresident, FXEducator.com

Back in November, I wrote an article titled "The Pound is Losing Weight" that mentioned a huge support level at 1.40 for GBP/USD. Well, after creating a temporary support at the 1.4460 area, we finally got there last week, with the British Pound collapsing to that level and beyond

CLICK HERE TO READ THE FULL ARTICLE

The Ruble is Rubble

The Ruble is Rubble

By Ed Ponsi, Online Trading Academy Forex Instructor

Russia's economy is in serious trouble. Russia is the world's largest energy exporter, and with the price of a barrel of oil sliding back below $40, there has been a sharp decline in capital flows to this Communist country. Russia needs oil at $70 in order to balance its budget, but with the world economy sliding into a recession, even conflict in the Middle East and threats of further OPEC production cuts haven't generated a sustained rally in crude. Without that oil money coming in, the Russian Ruble is falling hard against the USD. Russia has devalued the Ruble gradually since November, and the move appears to be accelerating (see figure 1).


Figure 1: Ruble hits a six year low vs. USD as Russia devalues its currency. Source: Saxo Bank

In addition to the price of oil, there are other problems. Many of the debts owed by Russia are priced in U.S. Dollars; this means that as the Ruble grows weaker, it becomes harder to repay these debts. Since the Ruble has lost about 25% of its value vs. the greenback since August 2008, those debts are now about 25% harder to repay.

Another key problem is leadership; investment capital is fleeing Russia partly because of the unpredictable and gangster-like behavior of its leaders. Investors have withdrawn more than $200 billion from Russia since the beginning of August, according to BNP Paribas. Why should investors put money into a country where free market capitalism has a tenuous hold at best? Why gamble on a country that plays an annual game of chicken with its customers, cutting off gas supplies in the dead of winter in order to gouge prices? Why take the risk that the unpredictable leadership might nationalize your company, thus rendering your investment worthless?

If Russia's economic problems lead to political upheaval, will the current leadership use force to stay in power? The current regime has shown no aversion to the use of violence to achieve political and economic gain. Their mugging of Georgia on the night of the opening of the 2008 Summer Olympics (the timing was an attempt to keep the story off of the front pages) is evidence of that. Taking all of this into consideration, is it any wonder that investment capital is fleeing Russia faster than you can say "Mikhail Gorbachev?"
The Four Horsemen, Revisited

Almost exactly one year ago today, I wrote an article titled "The Four Horsemen, the S&P, and the Yen." In that article, I pointed out that the S&P 500 had formed a massive double-top, a very bearish formation that indicates the end of an uptrend, and that key stocks such as Apple, Google, Amazon, and Research in Motion had formed the ominous pattern as well. Let's take a look at the 1-year performance of the S&P 500 and those stocks since then (figures as of the Jan. 14, 2009 close courtesy of AOL finance).

Stock Symbol


Price

GOOG


-53.97%

RIMM


-53.24%

AAPL


-52.33%

AMZN


-41.49%

S&P


-40.67%

The article also pointed out a head and shoulders in the GBP/JPY pair and a double-top in EUR/JPY – two currency pairs that closely mirror the action seen in the equity markets. This is a good example of the following; whether you're trading an index, a stock, or a currency pair, technical analysis is a valuable tool. No matter which vehicle you choose to trade, a trend is still a trend, a reversal is still a reversal, and a double-top is still a double-top. This also means that if you understand technical analysis and how to apply it correctly, you can trade most financial markets.
Question of the Week

Q) Good evening, Ed. I have just completed your recent article regarding the time you spend during vacation catching up on reading. Thanks for the reading tips! I have a question; do you consider pivot points a reliable support and resistance tool? It appears that pivot point levels serve as a road map in determining the direction of the intraday moves. Can you give us your thoughts on the use of pivot points?

Ed Ponsi) Hi Renee, good to hear from you! Pivot points can be useful intraday, but if you think about it, you could get the same effect by simply selling a break below support or buying a break above resistance. You could also use support and resistance areas as targets instead of using the pivot points R3 or S3 as targets. To sum up, I think that pivot points can work, but they don't necessarily work better than good old support and resistance. Good luck!
Is It All in the Digits?

According to a Cambridge University study, the length of a trader's fingers may reveal the size of his income. The longer the ring finger is compared with the index finger, the bigger his pay is likely to be, a study of London traders found. The secret may be revealed in the "digit ratio", which reflects the length of the index finger divided by the length of the ring finger, according to a study of 44 London traders. Traders with long ring fingers made an average of about $1 million USD, compared with $90,956 USD earned by traders with shorter ring fingers, according to the study.

Previous research has found that the digit ratio reflects how much testosterone an unborn baby was exposed to in the womb. Those exposed to high levels of the hormone are more sensitive as adults to testosterone that creates feelings of confidence and encourages risk-taking.

The long-ringed-fingered among us should keep one thing in mind; while those sensitive to high testosterone levels (risk-takers) may make more money, they may be more prone to blowing up their accounts, too. In traders on a winning streak, testosterone will keep rising until the hormone eventually causes manic, irrational behavior, turning the boom into a bust, said J.M. Coates in a separate study published last year in the Proceedings of the National Academy of Sciences. Let's be careful out there!

Forex Basics and Beyond

Forex Basics and Beyond

By Ed Ponsi, President of FXEducator.com

Q) Hi Ed, as a New Year exercise, I was running through some of the major currency pairs and I was kind of shocked when I analyzed the AUD/USD pair. A great double-bottom seems to have laid itself out on the daily charts, and prices are currently near the neck line @ 0.6950. If I recall clearly, the EUR/USD only a few weeks ago formed a similar pattern and sprung to the topside rapidly. It could be that AUD/USD is preparing for a similar fate by following the same pattern, and could be a DEJA VU (with money to be made)?

Ed Ponsi) Hi Abs, thank you for your email. Sure looks like you might be onto something here; the price action on the daily chart shows AUD/USD breaking to its highest point since October of last year. The formation could be considered a double-bottom or perhaps even a cup and handle

So, while the technical analysis looks good, what about the fundamentals? The Aussie dollar is a commodity currency, and commodities have performed poorly of late, to put it mildly. Any bet on Aussie right now is a bet that commodities have bottomed – and I do think we are closer to the bottom than the top, but still some potential downside. Additionally, there is the interest rate differential; while the Reserve Bank of Australia's current rate (4.00%) is expected to drop, it will remain higher than the Fed Funds rate as long as it stays above 0.25%, and I think it's a good bet that the RBA won't go that low. Speaking of Australia's central bank, they helped to put in the bottom of the formation by intervening in the currency markets late last year. The RBA stepped into the market and bought Aussie dollars, which helped to keep the AUD/USD exchange rate above .6000. With this confluence of technical and fundamental factors, you might have yourself a good setup here – it all depends on the commodities market. Good luck!

Q) Ed, I'm very interested in Forex trading but totally lack the knowledge to even comprehend the outcome. The TA side I have down cold due to 20-plus years of trading activity. The question - what is the value of a trade if the underlying moves up say 1 pip? OK, I buy a mini lot of 10k EUR/USD at say 1.3999. Now if the price moves to 1.4000 what is my gain on the trade? Discount commissions or bid/ask spread.

Ed Ponsi) Great question! To answer this and other concerns, let me first explain the different types of accounts. The types of accounts are differentiated by the size of one lot in each account, with each level greater than the one beneath it by a factor of ten:

Standard Account = 100,000 units per lot

Mini Account = 10,000 units per lot

Micro Account = 1000 units per lot

Referring to the scenario in your question, the value of one pip on the EUR/USD currency pair would be:

Standard Account = $10

Mini Account = $1

Micro Account = 10 cents

The part of your question that deals with commissions is a bit more difficult, since just like in the stock market, every Forex broker has their own commission structure. Many Forex brokers charge only the spread, with their commission and other fees included within that spread, but some charge a commission in addition to the spread. Also, some Forex brokers offer fixed spread platforms, while others offer variable spreads (and some offer both). My recommendation would be to open and trade a Forex demo account (it's free) to get used to the values of the various currency pairs and how they move. Everything that you already know about technical analysis applies to the currency market, so you are ahead of the game on that count. Trading a demo account will educate you on these other issues without the risk of loss. Good luck!

Q) Hi Ed, I'm a loyal reader and find your articles very interesting. My question is about the relationship between the U.S. Dollar and the U.S. stock market. I'm confused because I read an article of yours pointing out that the relationship is inverse, maybe I didn't understand. If the dollar rises, stocks go down. My confusion arises because my reasoning is as follows: If the stock market is bullish, then people around the world would want to get in. If so, they would have to buy dollars to buy U.S. stocks, creating demand for the dollar and the stock market and pushing both up. The inverse would be true if the situation were reversed. So, under my train of thought, the relationship is positive and not inverse. I would appreciate if you can clear up my confusion.

Ed Ponsi) Great question! What you are saying makes sense and is often the case; however we are in an unusual and abnormal market situation to say the least. Think of it this way; stock markets all around the world performed poorly in the latter part of 2008, and all types of traders dumped equities en masse, with the intention of stashing that cash in a safe place. But where are they going to put it? One safe haven is the U.S. Treasury market; the problem is you need U.S. Dollars in order to buy U.S. Treasuries. This means that investors all around the world have been exchanging their home currencies for the U.S. Dollar, and putting the proceeds into U.S. Treasuries. This in turn has driven the price of Treasuries through the roof, bringing yields down to incredibly low levels (see figure 1).

Figure 1: U.S. Treasury yields collapsed in 2008. Source: Bloomberg.com

Back in the late 1990's, a bull market in stocks drew investors to the U.S. to invest in the NASDAQ. Consequently, the USD performed well at that time. Today it is the bond market that is attracting all of the attention, but eventually that will change, too. When yields on Treasuries begin to rise, it may be the first sign that this bond rally is coming to an end. Good luck!