FX Educator

We've Moved! Check us out on Twitter!

2009-12-01T17:58:00.000-08:00

Hi Everyone!

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

edponsi on Twitter.com

See you there!

Ed Ponsi on CNBC and Forex TV

2009-10-30T10:37:00.000-07:00

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

2009-09-23T19:31:00.000-07:00

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

2009-08-19T20:02:00.000-07:00

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:

2009-08-14T18:30:00.000-07:00

CLICK HERE TO VIEW!

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

2009-07-30T15:25:00.001-07:00

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

2009-07-26T01:46:00.000-07:00

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

2009-07-09T17:46:00.000-07:00

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....

2009-05-19T07:10:00.000-07:00

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

Forex Hedging, R.I.P.

2009-05-08T09:43:00.000-07:00

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

2009-04-28T14:58:00.000-07:00

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"?

2009-04-22T04:08:00.000-07:00

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

2009-04-15T07:13:00.000-07:00

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

2009-04-07T12:44:00.000-07:00

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

2009-03-31T15:06:00.000-07:00

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

2009-03-27T16:39:00.001-07:00

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

2009-03-18T07:48:00.001-07:00

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

2009-03-11T04:17:00.000-07:00

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?

2009-03-05T02:39:00.000-08:00

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

2009-02-25T07:12:00.000-08:00

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?

2009-02-19T04:52:00.000-08:00

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?

2009-02-16T03:55:00.000-08:00

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

2009-01-28T09:32:00.000-08:00

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

2009-01-20T15:46:00.000-08:00

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

2009-01-13T09:19:00.000-08:00

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!

What I Did on My Winter Vacation

2009-01-07T14:40:00.000-08:00

What I Did on My Winter Vacation

By Ed Ponsi, President, FXEducator.com

If you think I spent the past week chilling on a beach in Rio and enjoying the scenery, you're only half right; I also took the opportunity to catch up on some long-overdue reading. Not all of these books are new, but each of them has something unique to offer. My highly subjective scoring system will rate these books on a scale of one to five pips, with the lowest score equaling one pip and the highest score equaling five. Here we go!

"A Bull in China" by Jim Rogers – Trading legend Rogers is best known for success with the Quantum Fund, which he co-founded with George Soros, and for making the early call on the huge commodities rally that ended in 2008. He is a trader/investor who chooses his battles very carefully and holds for the long-term. Despite his tremendous success in the financial arena, Rogers comes across as extremely down to earth, someone you'd like to swap trading stories with over a cold beer. Previous books by the author detail his adventures riding a motorcycle around the world ("Investment Biker") and his fervor for the futures markets ("Hot Commodities").

You've got to hand it to Rogers; he doesn't just talk the talk, he walks the walk – his belief that the U.S. Dollar is destined to fall has led him to divest himself of all U.S. assets and move his family to Singapore, where he can better participate in the ongoing economic explosion that is China. Rogers compares China in 2008 to the U.S. in 1908 in terms of economic potential. Then comes the strength of the book; the author quickly moves beyond the introductory portion and reveals solid, practical reasons and methods for investing in China. Rogers breaks down the myriad share classes that Westerners must navigate if they wish to participate in this market, and explains why China's present currency policy should lead to a future boom in share prices. The book is an extremely easy read; if you've seen Rogers on TV you know that he gets right to the point, so let's give our highest score of 5 pips to "A Bull in China".

"The Age of Turbulence" by Alan Greenspan – I can't tell you how many times in the past I've stood in a trading room, sharing puzzled looks with other traders as we tried to determine what the heck Alan Greenspan was trying to communicate to us. Is he bullish or bearish? Greenspan was a master of the art of obfuscation; his comments were intentionally ambiguous as he attempted to inform the markets without roiling them. So of course, I was reluctant to read a book written by a man who has a reputation for talking in circles. What a pleasant surprise that his book turned out to be straightforward, informative, and entertaining. The first half is a fast-moving biography, filled with entertaining anecdotes and insightful commentary. Greenspan presents himself as a somewhat nerdy economist who worked hard and became a success, but at the same time he is ever willing to poke fun at himself. The stories are great; Greenspan talks about his relationships with economic and political luminaries and gives his fair assessment of every U.S. President from Gerald Ford to George W. Bush. He also writes about his friendship with philosophical novelist Ayn Rand and her influence on his work (she nicknamed him "The Undertaker" for his dour demeanor and dark suits). The second half of the book has a slower pace, but presents interesting lessons on his policies and how he sees the future. The bottom line: this is a worthwhile read; get it if only for the first half, and you will get a good sense of who Greenspan really is, and what it is like to be a Fed Chairman. This book gets a score of 4.5 pips.

"Freakonomics" by Steven Levitt and Stephen Dubner – This book has a fascinating premise; why not take the statistical measures that an economist like Greenspan might use to determine the direction of the economy and apply them to everyday life? This is a great concept, and the book begins promisingly, as the authors apply economic models to everything from real estate agents to Sumo wrestlers to schoolteachers. The surprising results often reveal the hidden motives of the subjects in question. One of the so-called "economic detectives" infiltrates a street gang and breaks down its structural hierarchy, describing its economic model as similar to a McDonald's franchise. However, this promising book fizzles as it keeps repeating the same themes, such as crime and cheating. I'd like to see the authors apply this concept to a wider range of subjects, as many types of human behavior are driven by economic concerns – meaning that there is virtually no limit to the potential applications of the book's unifying concept. Good in parts but wildly uneven; let's give Freakonomics a score of 3.5 pips.

"Fooled by Randomness" by Nassim Nicholas Taleb – Here's an interesting question; how much of our performance as traders is based on skill, and how much of it is due to luck? Taleb clearly believes that financial markets contain a high degree of random activity, and that good risk management is the only protection from it. In the process, he rips financial engineering as a pseudoscience, and calls into question the importance of the heretofore all-important track record of a trader (what if the trader was not really good, only his style worked well during a specific period of time?). The author compares various traders and explains why the best trader isn't necessarily the one who makes the most money. He calls into question the importance of back testing, since you can only test things that have already happened, and the future does not always equal the past. Taleb mocks the Nobel Prize winners who led the Long Term Capital Management hedge fund to ruin, for failing to even consider the possibility that their analysis might be wrong. Finally, the author warns of the "Black Swan" – those seemingly unforeseeable random events that render analysis useless and send the quants back to the drawing board, over and over again. This eye-opening book gets a score of 4 pips.

That's all for now, but tune in next week as we get back to charting the market and answering your questions. See you then!

The Hottest Spot South of Havana

2009-01-04T01:34:00.000-08:00

The Hottest Spot South of Havana

By Ed Ponsi, President of FXEducator.com

Greetings from Rio de Janeiro! It's summertime here, hot and humid and rainy. While we wait for the weather to clear (in anticipation of a trip to the beach), let's take a look at the beleaguered local currency, the Brazilian Real (symbol BRL).

The Brazilian Real is a commodity currency, meaning that it tends to do well when commodities prices rise, and performs poorly when they fall. Since commodites prices have collapsed in recent months, the Real has been punished accordingly, losing 22 percent vs. the U.S. Dollar since Sept. 26. The currency has weakened by more than 30 percent since August, when it reached a nine-year high against the dollar.

Crude oil is the #3 export of Brazil, and the sharp decline in energy prices has weighed heavily on the currency. Brazil is also a big producer of copper, which has been hammered lately. Coffee is also a big product, along with commodities such as soybeans, iron ore and sugar. When commodity prices recover, the Real should recover as well.

The recent decline of the Real is in sharp contrast to its overall performance. In fact, it has been the best-performing emerging-market currency over the past four years. Much was made of the fact that Brazilian supermodel Gisele Bundchen prefers payment in Real over U.S. Dollars, a strategy that would have rewarded her richly up until the currency's recent nosedive. In case you were wondering, supermodels are not officially listed as an export of Brazil.

Brazil's benchmark interest rate is a whopping 13.75 percent. This is in response to high inflation; the country posted 12-month consumer price inflation of 6.4 percent through the end of November. This is well above the Central Bank target of 4.5 percent.

Brazilian interest rates are set by the Banco Central do Brasil, which is popularly referred to as the Central Bank. The Central Bank takes a hands-on approach to the currency markets, and intervenes frequently to drive exchange rates to desired levels. Although in recent years this has meant purposefully weakening the Real vs. the U.S. Dollar, the Central Bank has acted to strengthen the currency within the past month. When the Central Bank wants a stronger Real, they puchase their own currency and sell U.S. Dollars in the open market. When they want to weaken the Real, they simply do the opposite.

The Central Bank projects that growth will slow to 3.2 percent in 2009 from 5.6 percent growth projected for this year. This is in sharp contrast to most of the world's major economies, which are currently experiencing negative growth.

While the high rate of interest may be a temptation to go long the Real, let the buyer beware. Goldman Sachs economists predict the Central Bank will cut Brazil's benchmark interest rate in January and ease rates six times in 2009, lowering the benchmark rate by a total of 150 basis points. While these actions, if taken, would bring the rate down to 12.25 percent, Goldman had previously estimated a rate increase of 150 basis points in the year. One could say that Goldman's expectations have taken a 300 basis point swing, from 15.25 percent down to 12.25 percent. While the Central Bank left rates unchanged at its December 10 meeting, it did discuss the possibility of a rate cut. This event changed more than a few minds about the future of Brazil's interest rates.

Final thought on the beaches here; newbies tend to believe that Copacabana or Ipanema are the best beaches in Rio because their names have been immortalized in popular songs. This is not the case. According to the locals, the best beaches in Rio are the ones you've never heard of. Besides, the hit song by Barry Manilow isn't actually about Copacabana Beach, but about a club named after the beach. Otherwise, it would be the hottest spot South of Havana.
Year-End Thoughts

There are certain things that every trader should do at the end of the year. I recommend highly that you perform this quick excercise. Take a look at your trading record for 2008, and calculate how much net interest you received (or paid) for the year. This is interest collected or paid due to positions, not simply interest you may have received on money that was idling in your account. What I have found is that traders who pay little heed to swaps (the amount of interest charged or collected on a given Forex trade) tend to pay a good deal more than they realized, because the numbers really add up over the course of a year. By the same token, traders who are cognizant of these issues tend to collect interest. In fact, the amount of interest collected can sometimes make the difference between a profitable trader and an unprofitable trader.

This is not to say that we should only take trades that result in positive interest, also called positive carry. Such a strategy would have proved disastrous in 2008, as interest rates on many high-yielding currencies were slashed repeatedly, causing them to plunge. But the amount of interest that is charged or collected per trade is a knowable quantity, and should be factored into the profit and loss equation.
Thank You!

I just want to say thanks to all of the loyal readers out there. 2008 has been another great year, and I hope that 2009 brings happiness to all of you. Who would have ever guessed that 2008 would bring a huge rally in the Japanese Yen, and the collapse of so many currencies? What will happen in 2009? Will the "carry trade" spring back to life after being devastated in 2008? Will the massive USD rally come to its conclusion? Will we get beyond this credit mess, or will it linger for years? These are the questions that are on traders' minds, along with many others. In addition to the wonderful rewards that the trading business can bring, it is the uncertainty and the unknowable future that keeps us coming back for more. It's a beautiful feeling to wake up every morning and ask yourself, "What is going to happen today? " Best of luck in 2009!

Trading Systems, Fibonacci and Forex Q & A

2008-12-10T17:41:00.000-08:00

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!

More Ed Ponsi on CNBC

2008-11-28T08:52:00.000-08:00

As Obama prepares to pick his top economic team, Sean Callow, senior currency strategist, Westpac Bank discusses what this means for the currency markets, with Ed Ponsi, president at FX Educator.com and CNBC's Martin Soong & Sri Jegarajah.

CLICK HERE to view

Citigroup's shares are worth 5-6 times more than where they are right now, says Bill Smith, president, SAM Advisors. He tells CNBC's Martin Soong why he is still holding the stock while Ed Ponsi, president at FX Educator.com explains why he would choose to do the opposite.

CLICK HERE to view

The Great Fibonacci Debate

2008-11-27T07:38:00.000-08:00

The Great Fibonacci Debate

By Ed Ponsi

Greetings from Acapulco! Even in mid-November, the weather here is warm and sunny - perfect for the beach. I have a great question from a reader this week about Fibonacci. Fib strategies have become very popular, but today there are so many permutations and variations on this basic theme that sometimes the useful aspects of this technique get lost in the shuffle. This question opened the door for what we might call the "Great Fibonacci Debate". Read on!

Q) Hi Ed, I have a few quick questions about Fibonacci arcs. Do you think they have any value, and do you use them? To me it seems like a working idea (Fibonacci numbers) is being taken a step too far (like calculating an RSI on an RSI). I've always thought, the more lines you draw on a chart, the more chance you have of the price being around one of the lines.

With the arcs sometimes the price "stalls" above or below them, but I can overlay a drawing my 3 year old son made and find the price stalling around his lines too :) And of course, the examples found in books and on the web are chosen as examples because they prove the author's point.
In your books you stated that you were a bit skeptical about Fibonacci numbers until seeing that they work. I was the same until reading your book and seeing them work while watching prices move. Also, as you said, because their use is so widespread, it becomes a self-fulfilling prophecy. The use of Fibonacci arcs doesn't seem so widespread, and I'm not sure whether they work because of some "mystical" order in the universe or not...Thank you in advance for your answer.

Ed Ponsi) Thank you for your question, you are right on the money. I agree that Fibonacci is a self-fulfilling prophecy, in other words it works because people believe it will work. For example, let's say that some traders believe that Fibonacci works, maybe even big traders like institutions, banks, and hedge funds. If these traders believe that EUR/USD will hit resistance when a leg of the downtrend retraces 38.2%, some of them will place sell orders at that exact point. If enough sell orders accumulate at that level, a wave of selling pressure will be unleashed on the currency pair if and when the 38.2% level is reached. Perhaps that is what happened in late October, as EUR/USD rocketed straight up to the 38.2% retracement of the move that began in mid-September and promptly reversed (see figure 1)

Figure 1: 38.2% Fibonacci retracement acts as resistance on the EUR/USD daily chart. Source: Saxo Bank

Is this a coincidence? It could be, but isn't it kind of strange that a movement of about 2500 pips would choose that exact location to stage a major reversal? I was highly skeptical of Fibonacci techniques when I first learned about them, but I have seen so many cases like the one above that I've become a believer myself.

Now if I'm correct in my assessment that Fibonacci works because it is self-fulfilling, then it makes sense to use it in the form that is used by most traders. You'll notice that in my examples, although I often display additional levels, I use only the 38.2%, 50%, and the 61.8% Fibonacci retracement levels – that's all. I don't use Fib extensions, Fib arcs, or Fib Trendlines. I stick with the major retracement levels because that's where I believe most traders focus their attention. After all, we don't want our order sitting out there alone; on the contrary, we want as many "friends" as possible entering the same trade at the same time as we are. A large enough quantity of buy or sell orders, bunched up together in a strategic location, could change the direction of the exchange rate.

So what about Fibonacci Fans? These are Trendlines that are created from Fib retracement levels. Now I don't necessarily believe that Fib Fans are used as widely as Fib retracements, so I don't use them. On the other hand, take a look at the recent action on the daily chart of USD/CAD; after staging a huge rally, the pair pulls back to its 61.8% Fib Fan line before finding support. Again, this could be a coincidence – in fact I believe it probably is a coincidence, because I don't believe that huge numbers of institutional traders are using Fib Fans as a part of their analysis (see figure 2).

Figure 2: 61.8% Fibonacci Fan line acts as support on the USD/CAD pair. Source: Saxo Bank

Finally, there are Fibonacci Arcs, Fibonacci Extensions and the rest of the ever-growing Fibonacci family of indicators. Fibonacci Arcs are curved lines that anticipate support and resistance in the same way that Fibonacci Fans do. I don't use them personally, because I don't believe that they are widely used by institutional traders. It's helpful to keep the following in mind – software that provides Fibonacci Arcs and hundreds of other indicators to Forex traders have only been widely available to the general public for about fifteen years, since the dawn of the internet boom. Yet somehow, traders made money before all of this fancy software became available. Could it be that traders made money over the years by keeping things simple, without all of the bells and whistles that are available today, and that modern day traders are turning the simple act of trading into an overcomplicated mess? Hmmm…

In recent years, it has also become trendy to use Fibonacci settings on moving averages and Bollinger Bands, among other things. In my opinion this is just ridiculous; it's not as if these numbers contained some magic key to the universe, so let's not treat them that way. In summary, if you're new to Fibonacci, take it slow and stick with the basic stuff, like Fib retracements, and good luck!

Too Funny - Ed Ponsi on CNBC

2008-11-26T07:04:00.000-08:00

Watch me crack up the hosts of CNBC's Squawk Box with my comments on Citibank...near the end of this video.

CLICK HERE to watch the video

The Pound is Losing Weight

2008-11-18T14:30:00.000-08:00

The Pound is Losing Weight
By Ed Ponsi

Hello from New York! It seems that one of my comments from last week's article confused the heck out of a few folks, and that's not surprising because it goes against conventional Forex trading wisdom. Please take a look:

Q) Hi Ed, just a quick question regarding your newsletter, I found it great. You explained in the last few lines that 'When the ECB and the Bank of England get serious about growth and cut rates more deeply, expect to see these currencies recover'. Is it not true that currencies get weaker if the interest rate is lowered? Can you explain what I am missing? Look forward to reply.

Q) It has always been my understanding that when there are rate cuts, the currency tends to weaken, not recover. It seems that the UK and EU have a lot farther to go with regards to rate cuts and therefore, the currency has more potential to weaken than the US dollar. Is this still the case?

Ed Ponsi) Thank you for your questions, it's nice to know that someone is paying attention! You're both right, conventional wisdom would say that higher rates would support the Euro and the British Pound, yet I stated that rate cuts were needed to improve the weakness we've seen in these currencies. Have I lost my mind? Not completely, but that's a question for another newsletter.

In a normal market, I'd agree that conventional wisdom would apply, and that lower rates would hurt the Pound and Euro – but the situation we find ourselves in is anything but normal. The fact that the Euro and Pound have higher interest rates than the U.S. Dollar has done nothing to prevent them from being crushed over the past three months, and currencies with even higher yields, like the Australian Dollar and the New Zealand Dollar, have been equally bad (unless you're short). In the current Bizzarro World of Forex trading, it is the low yielding currencies that have taken center stage as the strongest currencies, and the high yielders that have fallen the hardest – the exact opposite of normal Forex activity. Here is the current interest rate environment for the major currencies:

Currency

Interest Rate
New Zealand Dollar 6.5% Australian Dollar 5.25% Euro 3.25% British Pound 3.00% Canadian Dollar 2.25% Swiss Franc 2.00% U.S. Dollar 1.00% Japanese Yen 0.3%

Consider this; the two best performing currencies of the major currencies during the third quarter have also been the two with the lowest yields – the U.S. Dollar and the Japanese Yen. In the U.S., the Fed Funds Rate sits at 1.00%, and is expected to fall to as low as 0.5%. Meanwhile, the Bank of Japan has lowered rates to 0.3%. Yet the greenback and the Yen have been crushing everything in sight - it's the carry trade in reverse!

Here's the way I see it – all of the above countries are going into or are already in a recession, and the policy of keeping rates relatively high in Europe and Great Britain is going to lead to an even deeper recession in those places. Mervyn King and Jean Claude Trichet, the respective leaders and chief policy makers of the Bank of England and the European Central Bank, seemed unduly concerned about inflation at a time when growth should've been the major concern. But as we will see next, that view is changing...

Q) Hi Ed. Wow exactly it happened!

"If the entire civilized world is falling into a recession, why is the Pound taking it on the chin? The Bank of England's Monetary Policy Committee has simply been too slow to cut the U.K.'s benchmark interest rate, which remains at 4.5%. The MPC's reasoning is that it must control inflation, but with world markets collapsing and crude oil falling below $70 per barrel, the pendulum has shifted and the time for action has come. In my opinion, the MPC should immediately be cut by another 150 basis points, but that's highly unlikely. I'm looking for more downside on the Pound."

You know what I feel today, I think King Mervyn has signed up for your newsletter and he's simply following you. Just kidding, anyway what is your opinion now on GBP after their rate cut? Thanks, keep up the good work.

Ed Ponsi) Thanks for your email and your kind words. The big rate cut by the Bank of England shows that King and the Monetary Policy Committee now "get it", however belatedly, and that the problem is not inflation, it is growth. In a complete about-face, King now says he is ready to reduce rates to 'whatever level is necessary' to counter the economic storm. Some even believe a zero percent rate is possible in the U.K. next year. That's a far cry from his "fight inflation" mantra from earlier this year. Don't be surprised to see the BoE cut by another 100 basis points as they try to get on top of the growth problem – a problem that would've been less damaging if they hadn't fallen behind the curve earlier. The damage is reflected in the daily chart of GBP/USD, which continues to spiral downward (see figure 1).

Figure 1: GBP/USD continues to probe new lows, crossing below 1.5000. Source: Saxo Bank

How low will it go? Nobody knows for sure, but I certainly wouldn't recommend stepping in front of this freight train. A look at the monthly chart shows big support at 1.4000, formed way back in the early part of this decade, which could come into play (see figure 2).

Figure 2: GBP/USD monthly chart shows a major support near 1.4000. Source: Saxo Bank

Last but not least, the GBP/JPY currency pair, one which we've been bearish for months, continues to plumb the depths and is also threatening to reach new lows (see figure 3).

Figure 3: Descending triangle on GBP/JPY suggests new lows are coming. Source: Saxo Bank

Once again, don't fight the trend. Good luck!

Forex TV - PM Exchange

2008-11-11T08:09:00.000-08:00

Hi Everyone,

Here is a clip from yesterday's Forex TV appearance. We discuss the immediate future for the US Dollar, the Euro, the British Pound, and the Japanese Yen. Enjoy!

Dollar and Yen on Fire, But For How Long?

2008-11-04T18:01:00.000-08:00

Dollar and Yen on Fire, But For How Long?

By Ed Ponsi

The plunge in EURUSD has Americans everywhere asking one very important question: is it too late to catch a flight to Germany for Oktoberfest?

Greetings from London! We are living and trading in historic times, as the credit crunch has thrust the U.S. Dollar and the Japanese Yen into the stratosphere, while crushing the British Pound, the Euro, and other major currencies. To get a feel for the scope of this move, let's have a look at the monthly chart of the Great Britain Pound – U.S. Dollar chart (symbol GBP/USD). We can see that the GBPUSD rally, which lasted for the better part of this decade, has given back the majority of its gains in just three months. A drop of nearly 4000 pips has sent the pair crashing through all of its major Fibonacci support levels.

London is one of my favorite places to visit, but it's even more fun for an American like me when my currency has some real buying power. For example, a nice meal at the pub next door to my hotel still costs about 30 GBP, same price as usual. Last November, when the GBPUSD exchange rate was about 2.10, that meal cost $63 (30 x 2.10 = 63). Now that the exchange rate has plunged to 1.60, that same meal, as measured in U.S. Dollars, costs just $48 (30 x 1.60 = $48). Now take that meal and multiply it by all of the goods and services that Americans purchase from the U.K., and you get a feel for the size of this move, and the impact it has on these two countries.

Of course, the rise of the dollar is not contained to the British Pound; the rampaging U.S. currency has also undone most of this decade's Euro rally as well. The plunge in EURUSD has Americans everywhere asking one very important question: is it too late to catch a flight to Germany for Oktoberfest? Sadly, the answer is yes. If it seems like it's only been a few months since the once-mighty Euro was smashing it's way to new all time highs vs. the greenback, that's because it really has been just a few months.

The buck is rallying due to frazzled investors dumping shares and stashing the proceeds into U.S. Treasuries, one of the best ports for financial safety in any storm. When you buy a Treasury, you are really lending money to the U.S. government. The vast size of the U.S. government's debts makes for a huge, liquid market in U.S. Treasuries, where institutional traders can ride out the storm. For more on this topic, check out last week's article "Forex and U.S. Treasuries".

Although the USD has rocked the house recently, there is another currency that has been so strong, it has even beaten the buck. Of course I'm talking about the Japanese Yen, which has been on an incredible roll vs. the rest of the world. The Yen has performed particularly well against the Great Britain Pound, which comes as no surprise to regular readers of this column. Two weeks ago, we walked readers through a short sale trade of GBPJPY, and in an early September article we laid out the technical case for shorting this currency pair, followed by another article that presented a fundamental argument for selling it. Well, I don't think anyone could have anticipated what a fantastic pair this would be to sell short, as GBPJPY crashed to multi-year lows. Once again, thanks for your kind words and congratulations to all of you who shorted GBPJPY along with me

I'm sure many of us wish the GBPJPY Express would continue its southbound trek, but nothing lasts forever. While its way too early to call an end to the trend, its might be difficult for the Yen to keep this pace due to the threat of intervention by the Bank of Japan and other Group of Seven central banks. In other words, Japan is threatening to sell the Yen in massive quantities in order to weaken it, causing pairs like GBPJPY to rise. Because Japan has an export based economy, a strong Yen is bad for business, as big exporters like Toyota and Canon are losing sales due to the falling exchange rates of USDJPY, EURJPY, and GBPJPY. Japan may even get help from other G7 countries in weakening its currency, according to an October 27 statement from the G7 itself. This rare currency volatility warning by the G7 has been interpreted as a sign that Japan and others may step into foreign exchange markets and artificially force down the Japanese currency if the Yen continues on its current rampage.

"We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability," said the G7 statement. While this may sound innocent enough, the implications of the statement are huge. If Japan intervenes, the real winner will be the U.S. Dollar, the currency that the Bank of Japan (BoJ) is most likely to buy in mass quantity as it is selling Yen. If the BoJ starts pushing USDJPY higher, do not get in the way – in its last major intervention, the central bank caused USDJPY to climb about 700 pips over a three-week period in early 2004.

Last but not least, thank you for all your kind comments and emails regarding my recent series of appearances on CNN. Yes, it was a blast and as you can tell, I loved every minute of it.

Ed Ponsi

Forex and U.S. Treasuries

2008-11-02T02:38:00.000-08:00

Hola from Mexico City! It seems that the markets are interconnected to a greater degree than ever before – last week's article on the Dow/ Japanese Yen trade is just one example of this phenomenon. With that in mind, I have a great question from a reader this week regarding another important relationship - the impact of the buying and selling of U.S. Treasuries on the Forex market. Here it is!

Q) Hi Ed, I follow your work and it's provided some very good insight. I have a two-part question. With all the short term volatility we're seeing, I read that the TED spread is one of many good barometers for this. In order to gauge the next stage in the cycle should we be looking at the 2 year or 10 year Treasury to gauge what's coming 6 months to a year from now? Also, how are the Treasury yields interpreted? Thanks for your response.

Ed Ponsi) Thank you for your question, I'll take part two of the question first. When it comes to interpreting Treasury yields, there is an inverse relationship between price and yield. In other words, when the price of the bond rises, that bond's yield falls. For example, let's say that you purchased a new bond with a yield of 4% at a price of 100, also known as "par". Let's assume that a year passes, interest rates rise, and new bonds come available that yield 5% at par. Well, assuming that the safety and the maturity date of the bonds are similar, the 4% bond is no longer as attractive as the 5% bond. You can't sell the 4% bond for 100, because bond buyers will simply opt to purchase the higher-yielding 5% bond at the same price. So, you must sell the bond at a discount price. To the new purchaser, his return on the 4% bond is actually closer to 5%, because when it matures, the bond he purchased at a discount (less than 100) will be worth 100. This makes up for the fact that the bond yields only 4%.

The recent fear that has gripped global markets is reflected in all maturities of U.S. Treasuries, but especially on the short end, for example the 3-month Treasury bill. Why is so much of the action contained in the near-term maturities? Imagine that you are a hedge fund manager, and you want to protect your clients. You simply want to get out of the markets and stash that cash in a safe place. You start buying 3-month Treasuries (T-Bills), because no matter what happens, you are going to get all of your money back at par within three months. Fund managers, investment bankers, and other investors, both individual and institutional, have been piling into T-Bills at an incredible rate – they have been buying, which drives the price higher and the yield lower. Here is a chart of the yield of a three-month T-Bill (see figure 1).

Figure 1: The yield on 3-month T-Bills craters in mid-October. Source: theFinancials.com

Last week, the yield on 3-month T-Bills dropped to virtually nothing. Investors were scooping them up anyway, because in a risky environment such as the one we're in right now, the philosophy of "better safe than sorry" is the way to go. Investors enjoy the certainty of knowing that no matter what happens to the price of these investments between now and the maturity date, they will mature at par.

The same can be said for the 2-year and 10-year Treasuries, but that is a longer time to wait and a lot of opportunities missed until maturity. So traders who opt for Treasuries with longer maturities have "price risk" – if they want to free that capital to invest at any point prior to maturity, they will have to take what they can get on the open market when they sell those Treasuries. Short and long term maturities offer the certainty of knowing that you can get your capital back at par, but many of the current buyers of 2-year and 10-year Treasuries will not wait until maturity to cash out. Somebody out there has been buying 2-year Treasuries, as evidenced by the chart (see figure 2).

Figure 2: 2-year U.S. Treasuries rise in price as the credit crunch intensifies. Source: Saxo Bank

This is a weekly chart of the price of 2-year U.S. Treasuries. The huge spike that appears to occur in late 2007 is a "bad tick" and should be ignored. A rising price indicates that investors are buying, and as the price rises, the yield is falling. Notice how the price begins to climb in the summer of 2007 - right around the time when the word "subprime" entered our vocabulary. Prices fell (and yields rose) in early 2008, as markets calmed down a bit, and then prices began to rise again (driving yields lower) this summer as the crisis became full-blown with the collapse of Lehman Brothers.

Regarding the TED Spread, which is explained in this previous article, it is a terrific way to gauge market fear, much like the VIX (volatility index). Both have come off of extreme highs, showing a possible light at the end of the tunnel for equity markets (see figure 3).

Figure 3: TED Spread drops suddenly, indicating greater confidence in bank lending. Source: Saxo Bank

It appears that banks are now more willing to lend money than they were last week, when the TED Spread hit its recent peak. Still, the level of fear is much higher than normal. Prior to the collapse of Lehman in September, the TED spread was about 1%. If it falls back into that 1% range, it will indicate that confidence has returned, and that the worst of the credit crisis may have passed. That would bode well for stocks, and bond prices would likely fall as traders pull money out of Treasuries and put that capital to work in the equity markets.

Have a question about Forex trading? Send an email to info@fxeducator.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.

Ed Ponsi

The British Pound Gets Pounded

2008-10-22T14:02:00.000-07:00

Tomorrow, I'll fly to London, a place I visit often on business. For many Americans, London has been as expensive place to visit during the past few years, but it's becoming cheaper by the minute as the British Pound has plunged beneath $1.63.

This represents a drop of 48 U.S. cents since the Pound peaked at $2.11 back in November. That might not sound like much, but in the highly leveraged world of Forex trading, it is a huge move of 4800 pips. A big chunk of that move, about 1000 pips, has occurred over the past three days.

What is wrong with the British Pound? Well, Prime Minister Gordon Brown has made it clear today that the U.K is heading into a recession, echoing comments made earlier this week by Mervyn King. King, the Governor of the Bank of England, also commented that the U.K.'s banking system was closer to collapse earlier this month than it has been since World War 1.

The amazing collapse of the British Pound has unwound most of the currency's gains for this decade against the U.S. Dollar. Measuring from the low point of June 2001, when the GBP/USD pair reached a nadir of $1.36, and the highs of November 2007, above $2.11, the pair has lost more than 60% of this decade's gains. It smashed through Fibonacci levels all the way down, falling like a piano pushed off of the top of the London Eye (see figure 1).

Figure 1: GBP/USD breaks all major Fibonacci levels on the monthly chart. Source: Saxo Bank

GBP/USD Chart

So where will the Pound go from here? Major support is located in the $1.55 area, which last acted as support in 2003. The rate of decline here is astounding, and traders who buy GBP right now might be catching the proverbial knife. I'll short rallies, if there are any to speak of.

If the entire civilized world is falling into a recession, why is the Pound taking it on the chin? The Bank of England's Monetary Policy Committee has simply been too slow to cut the U.K.'s benchmark interest rate, which remains at 4.5%. The MPC's reasoning is that it must control inflation, but with world markets collapsing and crude oil falling below $70 per barrel, the pendulum has shifted and the time for action has come. In my opinion, the MPC should immediately cut by another 150 basis points, but that's highly unlikely. I'm looking for more downside on the Pound.

One final note, I'm scheduled to appear live on CNN Business International on Monday, Nov. 27. See you then!

Ed Ponsi is the President of www.FXEducator.com and www.EdPonsi.com. He has appeared on CNN, CNBC, the BBC and Fox Business News, and is a frequent guest lecturer at trading events and seminars around the world. Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. Ponsi is featured on the FXEducator.com DVD series, Forex Trading with Ed Ponsi, and is the author of the best-selling book Forex Patterns and Probabilities

Using Stocks to Trade Forex

2008-10-21T09:32:00.000-07:00

How can traders use recent stock market volatility to make money trading Forex?

CLICK HERE to read the article!

Light at the End of the Tunnel

2008-10-20T11:57:00.000-07:00

Forex traders have been enjoying incredible volatility lately – provided that they’ve widened their stops and targets. Moves of several hundred pips in one hour are not uncommon, while similar moves used to occur over the course of a day. I’ve been trading the Japanese Yen against the British Pound (GBP/JPY) recently, taking advantage of the weakness in the U.K. economy (and by extension, the Pound) and the fact that the Japanese Yen Loves Misery. There have been plenty of opportunities to sell this pair, which has stabilized - at least temporarily – in the 170’s.

Figure 1: GBP/JPY downtrend has stabilized for the moment. Source: Saxo Bank

GBP/JPY Chart

Using this downtrend as a guide, I’ve been selling the GBP/JPY pair short when the 14-period Relative Strength Index (RSI) indicates that the pair is overbought in the short term. RSI exists on a scale that runs from 0 to 100, with readings above 70 indicating an overbought situation, while readings below 30 point to an oversold situation. A buy signal is given when RSI crosses above 30 after passing below, and a sell signal is indicated when RSI crosses below 70 after passing above. Since the currency pair is in a downtrend, I’m only interested in the sell signals, and I ignore the buy signals. This prevents me from trading against that fierce downtrend that is so clearly indicated in the daily chart (see figure 2).

Figure 2: Two sell signals and one buy signal on GBP/JPY hourly chart. Source: Saxo Bank

GBP/JPY Hourly Chart

How long will this continue? Well, there may be a light at the end of the tunnel. For the first time in weeks, we are getting word that banks are lowering the rates they are charging each other for 3-month USD loans. If this keeps up, expect the credit crisis to ease, and the Yen to reverse. Also, there might be a double bottom forming on the GBP/JPY daily chart (see figure 1). But for now, it’s too early to call the top on JPY, so until the Yen shows some technical weakness, I’ll continue to buy it vs. GBP and EUR.

Ed Ponsi is the President of www.FXEducator.com and www.EdPonsi.com. He has appeared on CNN, CNBC, the BBC and Fox Business News, and is a frequent guest lecturer at trading events and seminars around the world. Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. Ponsi is featured on the FXEducator.com DVD series, Forex Trading with Ed Ponsi, and is the author of the best-selling book Forex Patterns and Probabilities.

Hang 'Em High!

2008-10-15T04:48:00.000-07:00

Hang 'Em High!

By Ed Ponsi

Ed Ponsi examines the Congressional grilling of Lehman Brothers' former CEO, and asks the question: In 2008, is it a crime to have money in America?

The other day, I was placing a short on GBP/JPY, trying to determine the exact location of my stop, when I heard the voice of defeat bleeding through my speakers. It was Richard Fuld, disgraced former CEO of the now-bankrupt investment giant Lehman Brothers, explaining himself before a Congressional committee:

"I want to be very clear, I take full responsibility for the decisions I made and for the actions I took. I feel horrible about what has happened to the company and its effects on so many."

I think it's a great idea to have a committee to determine what went wrong and how a similar boondoggle can be prevented in the future. I sure would like to know the rationale behind the investment grade ratings that were placed on toxic subprime paper. But most of all, I'm interested in learning if Mr. Fuld and his associates at Lehman looted the company on their way out the door. But the committee didn't seem interested in getting to the truth, or in finding solutions. Instead, the committee seemed intent on punishing Mr. Fuld, well, for being wealthy.

Enter Henry Waxman, D-Calif., chairman of the House Oversight and Government Reform Committee. Waxman repeatedly asked Fuld if it was true he made between $400 and $500 million running the company since 2000 – as if Fuld's impressive compensation somehow implied guilt. Waxman listed Fuld's collection of property – including a $14 million dollar ocean-front villa in Florida and a home in the exclusive ski resort of Sun Valley, Idaho. "You and your wife have an art collection filled with million dollar paintings." Waxman said. The chairman seemed more concerned with outing Fuld as a rich guy, as opposed to exposing any wrongdoing.

What is the point of these questions? Are we trying to convict this guy of having money? If so, he's guilty! But in the America where I live, it is not a crime to have money.

There are rumblings of shady dealings in the final days of Lehman, most notably the steering of millions of dollars to executives as the firm was in full collapse. The company allegedly sought $23.2 million in "special payments" for three outgoing executives just days before the collapse, according to internal documents. This disgusting act is the equivalent of looting a gravesite. If that happened, then any and all of the Lehman perpetrators should be prosecuted to the full extent of the law. String em' up! If Fuld was involved, I look forward to seeing him take the "perp walk". He'll have an awfully hard time enjoying that ocean front villa from behind bars.

I'd just like to point something out – Fuld did not benefit from the collapse of Lehman Brothers. In fact, he lost a great deal of his own money, along with his job and his reputation. Fuld still holds about 10 million—now worthless—shares in the firm. Think about that for a second; he lost 10 million dollars for every one dollar decline in LEH stock, which traded near $70 per share about a year ago. That's a loss of nearly $700 million dollars! That had to leave a mark, even for a guy like Fuld. Don't get me wrong, he won't be dining in a soup kitchen any time soon, but that's got to hurt!

Fuld owned all of the wonderful things enumerated by Waxman long before Lehman fell. As far as we know right now, he did not benefit in any way by being the captain of a sinking ship, or by becoming the butt of a million jokes, or by becoming a dark footnote in U.S. financial history. Soon after the bankruptcy announcement, Fuld was allegedly punched in the face by a co-worker in the Lehman gym. Journalist Vicki Ward told CNBC, "He was on a treadmill with a heart monitor on. Someone was in the corner, pumping iron and he walked over and he knocked him out cold.” Ouch!

Yes, he has a lot of money, and that seemed to be the point of Waxman's line of questioning. Fuld would have a great deal more money right now if Lehman hadn't gone under. Why was money the focal point of Waxman's questions? Perhaps Mr. Waxman believes that the public is bloodthirsty and wants revenge, that we can be lured into class warfare, and that we are not concerned with the facts. And while Waxman set the tone, this "Hang 'em high" mentality is also evident in the questions of the other members of the committee. If Fuld committed any crimes – if he was involved in the heinous act of steering millions to executives as Lehman fell – then could we please talk about that, and not simply beat the guy up for being rich? If any crime was committed, then that should be the focus of the discussion. Let's not pretend that it is a crime to have money in America.

Investment Terminology 2008: It's a very good time to be a trader, but maybe not such a good time to be an investor. Still, with the way markets are behaving, those of us who wear both the trading and investing hats could use a reason to smile right about now. On that note, thanks to one of our readers for sending this to me via email:

CEO = Chief Embezzlement Officer.
CFO = Corporate Fraud Officer.
VALUE INVESTING = the art of buying low and selling lower.
P/E RATIO = the percentage of investors wetting their pants as the market keeps falling.
BROKER = what my broker has made me.
FINANCIAL PLANNER = a person whose phone has been disconnected.
STANDARD & POOR = description of an investor's life in general.
INSTITUTIONAL INVESTOR = a frustrated investor who's now locked away in an institution.
MARKET CORRECTION = something that occurs the day after you invest in the market.
CASH FLOW = the movement your investment makes as it disappears down the drain.

Have a question about Forex trading? Send an email to info@fxeducator.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.

When Central Banks Attack

2008-10-09T09:51:00.000-07:00

By Ed Ponsi, President, FXEducator.com

New York City - After yesterday's barrage of rate cuts, today we are seeing salvos fired by the central banks of Hong Kong (50 bps to 2.00%), Taiwan (25 bps to 3.25%), and South Korea (25 bps to 5.00%). This comes hot on the heels of yesterday's simultaneous cuts by the ECB (100 bps), the Fed, the Bank of England, and the Bank of Canada (50 bps), and many others.

All of this cheap money is wonderful, but even if all of the world's central banks cut rates to zero, banks would still be reluctant to lend money. As the old saying goes, you can lead a horse to water, but you can't make that horse lend money to banks at reasonable rates. Or something like that. Nobody is going to put a gun to a banker's head and force him to lend money. Nobody wants to be the last person to lend money to the next victim, the next Bear Stearns or Lehman Brothers.

For evidence of this, take a look at the Ted Spread, a fear gauge that climbed to its highest point in a decade just after the announcement of the joint central bank action. The Ted Spread is the difference between LIBOR and the yield of the 3-month US Treasury, and yesterday it climbed above 4%. This means that banks are demanding 400 basis points above what they would receive from the Treasuries, which have no risk. For most of this decade the Ted Spread has lingered beneath 1%. Banks are demanding higher rates to compensate for the perceived risk of lending to financial institutions.

One final thought; the cover of Time magazine features a Depression-era photo of men crowding in line beneath a sign that reads "Free Soup". I'm not one to call tops and bottoms, but if history is any guide, this could be an early sign of a bottom. Historically, excessive exuberance or excessive pessimism, as reflected by magazine covers and other forms of pop culture, are signs of a market turn. In late 1999, as the Nasdaq was rocketing to a gain of over 80% for the year, magazine covers featuring bulls were all the rage. There were even two prime time TV shows about Wall Street and the stock market. Needless to say, one year later, nobody wanted to talk stocks.

How To Trade In Challenging Times

2008-10-09T04:46:00.000-07:00

How To Trade In Challenging Times

By Ed Ponsi

Okay, so things are rough out there. Bear Stearns, Lehman Brothers, Washington Mutual, American International Group, B&B, Freddy and Fannie and the rest of the gang have all either gone to that Big Vault in the Sky, or are on life support. The proverbial "other shoe" has dropped so many times that we've all lost count – and the carnage isn't yet complete. But just because the world is facing financial Armageddon, and long-term investments are falling apart faster than the New York Mets in September, that doesn't mean your trading account has to suffer. In fact, some traders thrive in this rock 'em, sock 'em environment. Just take a look at the volatility in the Great Britain Pound – U.S. Dollar currency pair (symbol GBP/USD). Note how the candles on the left side of the chart are much bigger than on the right, indicating that the daily range has expanded dramatically. Also, take a look at the Average True Range indicator (ATR), which shows us that the average daily range of GBP/USD over the past 14 trading days now exceeds 300 pips! (See figure 1).

Figure 1: GBP/USD's average daily volatility has risen to over 300 pips. Source: Saxo Bank

This level of volatility hasn't been seen since the year 2000, and the type of wild action it creates will be welcomed by some traders and avoided by others. Here are three key thoughts to help you trade safely and securely during these challenging and historic times.

Nimble – Things are happening quickly out there, and the wide swings in volatility are causing markets to move faster and farther than before. In fact, volatility in the currency markets is at its highest point since the year 2000. What's a trader to do? Traders looking for quick intraday moves need to keep their finger on the trigger at all times – especially when they are already in a trade. The game changes quickly, so be ready for action at a moment's notice. Put your mouse cursor directly above the exit button, and keep your finger poised above the mouse. That way, you'll never be taken by surprise, and you'll always be ready to close your position.

Pip Slip – Prepare for slippage, as fast moving markets may cause some surprising fills. This is a common occurrence in the stock markets, but currency traders have been largely immune to slippage - that is, until the recent spike in volatility changed the game and turned the trading world upside down. How to deal with this problem? Plan ahead and don't be surprised when you get a bad fill; in fact, make it part of your game plan. When performing your calculations, assume that the price you receive for both buys and sells will be slightly worse than you would normally anticipate. Not only will you be prepared for a bad fill, but you may find yourself pleasantly surprised when you get a good one!

Park It - Trading in this fast-paced environment isn't meant for those with a nervous stomach. In fact, many of us would be better served by simply staying out of the trade and watching from the sidelines until the markets settle down. Always remember that part of our jobs as traders is to know when to avoid trading. The truth is you should never feel as if you absolutely have to place a trade, and you should only place trades when you feel that the odds are in your favor. Selectivity is the key; you will make more money from one good trade than you will from ten mediocre trades, so maintain your focus and only take the best trading opportunities.

Question of the Week

Q) Ed, I keep hearing about LIBOR in connection with the bailout but I'm not familiar with this term. Can you please explain what it means and why it is important to traders?

Ed Ponsi) Thank you for your question. LIBOR is short for London Interbank Offered Rate, and it represents the cost of borrowing dollars overnight in London. On September 30th, the last day of the third quarter and the day after the bailout plan first failed to pass through Congress, LIBOR spiked an incredible 431 basis points to 6.88%. Let's think about that for a minute; banks are charging each other an annual rate of 6.88% for overnight loans! They must be pretty frightened to charge such a high rate, perhaps because no bank wants to lend money, only to find out later that the borrower has evaporated.

In a way, you could say that LIBOR is a "fear gauge", and it is telling us right now that banks do not want to lend money to other banks except at ridiculous rates. This is despite the fact that the Fed and other central banks are constantly pumping liquidity into the system, jamming the banks full of cash so that they'll be more willing to lend. Many of the banks are just hoarding this added capital for their own needs instead of lending it out to others, defeating the purpose of the Fed's actions.

Right now we are seeing strength in the U.S. dollar, and that is because the USD tends to perform well when fear is high. But this will pass; fear is a temporary condition, and as bad as it may seem right now, things will eventually get better. When they do, watch out – the bill will come due for this mess, and when it does, it will weigh heavily on the greenback. Enjoy the USD rally while it lasts.

Have a question about Forex trading? Send an email to info@fxeducator.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.

Ed Ponsi

ATR and the TED Spread

2008-10-01T03:58:00.000-07:00

Greetings from New York! This week, we have answers to your questions about Average True Range, the TED Spread, and more.

CLICK HERE to read the article

Ed Ponsi on CNN Today....

2008-09-24T08:27:00.000-07:00

Hi Everybody,

I'm back on CNN International today between 7pm and 8pm London time (bet. 2pm and 3pm New York time). See you then!

Ed

Disaster Trading: Your Responses

2008-09-17T11:57:00.000-07:00

Wow! Last week was the very first time I've asked for your responses to a question, and the feedback was overwhelming. If you missed last week's article, a philosophical question was posed; is it ok to place trades that are designed to profit from a natural disaster such as a hurricane? For the sake of clarity, I want to be clear that I am talking about trades that are specifically engineered to benefit from a disaster, not trades that just happened to be affected by one. I mentioned that I once traded for an outfit that had an "unwritten rule" against designing trades in this manner, and I continue to adhere to this attitude, but that doesn't mean that I don't respect those who disagree – I do, especially after reading your thoughtful responses.

I'd also like to point out that this is very different from the argument that blames speculators for all that is wrong with the markets. There are those who blamed speculators for driving the price of oil to $147 per barrel; now that the price has fallen more than $50 per barrel and is below $100, do we hear any praise for the speculators? I haven't heard a word of it, and I don't expect to. Speculators are always present in every market, whether that market is going up or down, and they are a necessary ingredient as they provide the liquidity that allows non-speculative market participants to have a counter party to their trades. Without the liquidity provided by speculators, markets would be thinner and consequently more volatile.

No matter whether you agreed or disagreed with me on this one, I'm very pleased not only with the quantity, but with the quality of your responses. It's clear to me now that not only am I reaching a fairly broad audience, but a thoughtful and intelligent audience as well, so I thank you one and all. My apologies, as only a small percentage of the responses could be accommodated - there were many good letters that you won't see here, due to limitations of time and space. Let's get to some of the highlights of your comments on this topic - plenty of you believe that it is wrong to place a trade specifically designed to benefit from a disaster:

"I completely disagree on trying to make profits on disasters. The market is full of opportunities, so if we cannot help those people, we might at least don't be a part of a bigger damage."

"I agree...I do not personally like the idea of trading off of other's misery. On a related subject, it seems that the "hot" new thing to do is buy "life settlements" also known as viaticals...that is, betting on when someone will die, and grabbing part of the life insurance. I think that is despicable, disgusting, and a reprehensible way to make a buck...but that's just me."

…But even more of you felt that it was ok – but usually with a few caveats. Here is a compelling argument in favor of disaster trading:

"Ed, There's nothing wrong with taking trades in anticipation of disasters. I cannot distinguish doing that from anyone who sells survival or emergency preparedness gear in their business. They profit from selling such gear because there's a good chance it's going to be used...and we've had plenty of disasters that show it's a good idea to have that stuff around. Should people not buy emergency gear? Of course, they should. And there's nothing wrong with selling it. By your logic, nobody should sell that gear, because they'd be likely to be making money off the misfortunes of others."

"I believe it is acceptable for a trader to take a position on this. Traders are in the business of making a profit with the least risk and if it means taking a position due to a disaster I do not see it being unethical. In my view any fundamental factor should be recognized and if a trader wants to trade the effect it could have it is acceptable. Now my closing thought is this - many people were adversely affected by these fundamental factors (losing jobs, losing homes, huge capital losses, etc.), but many traders profited. Was this unethical enrichment?"

"Do undertakers and funeral homes profit off disaster? Is that ‘wrong'? Profiting off disasters might be distasteful but it isn't immoral unless you are doing something that causes or worsens the disaster. If a store owner can raise prices on lanterns and candles in anticipation of, or because of, a hurricane, that will encourage more store owners to carry these items in the future. What's immoral about that?"

Several of you suggested that the profits from a disaster trade should be donated to the victims:

"The middle ground, and generous thing to do, would be to pay the profits from disasters into disaster funds to assist those badly affected."

"What's wrong is price gouging when disasters occur -- when people try to sell a $1 bottle of water for $5. I'll agree that's objectionable (and indeed, criminal). But if I see that a disaster will occur, and I make a trade based on a sound fundamental reason, I see nothing wrong with it. Perhaps, with my profit, I can donate more money to aid disaster victims."

"Take a percentage of whatever profits you make (what % is also your choice) and donate it to help the people you feel you made money off of. That way you are not only doing your job to the best of your ability, you are also helping those in need.... and if you choose to cheer out loud, do it because you were able to help someone else in need just by doing what you do best, TRADE!"

Some felt that we could extend this idea into other areas of trading:

"I found your discussion of trading during disasters very interesting. The picture you painted of traders cheering while others were suffering painted a very vivid picture. I have struggled with a similar idea. That is, trading against the economy of one's country. I cannot feel good about cheering a long EUR/USD position when that means that the NFP has plunged. If the NFP goes down it means friends, relatives and countrymen are losing their jobs, and the USA economy is tanking. Not much different than a disaster, really. Or am I not seeing things correctly?"

That brings up an interesting point. I did quite well shorting the U.S. Dollar earlier this year, as I'm sure many of you have over the past few years. I always told myself that it was ok because although various U.S. government officials claimed to support a "strong Dollar policy", I've felt very strongly that in reality they wanted the USD to weaken, in order to benefit big U.S. exporters. Because of this I never felt bad about shorting the buck – even as I've been calling for a change in this policy, because of its deleterious effects on the average American. It's not the traders, but the policies of our government that made the buck such a great short this decade.

Here is a great letter from a person who is both an investor and a relief worker:

"As a Disaster Worker I volunteer with agencies at the local, State and Federal level, and as an investor, I'd like to say that I find trading to profit from natural disasters to be fully acceptable. There are whole industries that depend on disasters for their livelihood, and no-one objects to them. Indeed, they are suppliers to governments, and necessary partners in the mitigation, preparedness, response and recovery process.

If they are not only allowed to profit from disasters, but encouraged to do so, shouldn't the investor, using only a computer or telephone be allowed the same ability? As long as none of us becomes "Lex Luthor", able to cause or control these disasters, then I see no problem with the ethics of the situation."

Here's a great thought on this topic:

"Is it morally right? I guess that depends on the individual and how driven they are by FEAR and GREED. And they should also ask themselves if they are sticking to their trading plan, I have not yet ever talked or met a trader that had developed a trade plan to trade natural disasters only."

And finally, let's end this on a high note!

"Thanks for regularly challenging your readership with excellent material on the currency market."

You're welcome, and thank you one and all for your participation – it's encouraging to have readers who are up to the task of dealing with these important issues, and who are able to express themselves their opinions while remaining civil. I'll see you again next week with a new topic.

Disaster Trading

2008-09-11T09:36:00.000-07:00

Q) I'm just trying to figure out what you mean when you say it's wrong to make money off a natural disaster. If I trade for a living, then am I supposed to ignore a pending natural disaster? Am I supposed to take a few days off of trading (or a few weeks) until the threat of the natural disaster has passed? What if I was long the dollar when I heard about the hurricane, would it be would wrong and unethical to change my opinion and close my positions out due to that news? If I trade professionally, and I don't, then I would be a fool to ignore any information that could change my opinion or the markets opinion and help me make money.

Just for the record I never considered shorting or buying the dollar based on the hurricane because I don't see the correlation in this particular case. But I think your statements about whether people try and trade this news or not were insulting and ignorant. Nobody is making money off the misfortunes of others. They are making money off of other market participants. It's a shame that natural disasters, and human caused disasters happen in the first place...but they do. And to ignore the potential consequences those disasters may have on a market would be totally and undeniably idiotic...and a recipe for disaster.

Ed Ponsi) Thank you for your question and comments. Maybe I'm being old fashioned here, but I think it's wrong to bet on Death, Destruction, and Disease to win, place, and show. I'm sorry to hear that you find my stance "insulting and ignorant" as you put it, but I guess we'll just have to agree to disagree. In my years as a Wall Street trader, my employer frowned upon such "disaster trading". He didn't want to hear his traders cheering as the body count rose, so I guess he was old fashioned, too.

I certainly never said that anyone should stop trading due to a pending natural disaster, or that anyone should ignore the consequences of such a disaster. That would be foolish. But that is very different from trying to profit from an anticipated disaster. For example, if you are short the USD due to technical or fundamental reasons and an earthquake occurs in the US, you were not trying to game the disaster. In this example, it's possible that you may have benefitted from a natural disaster, but that wasn't the specific intent. That would be very different from placing trades that were specifically designed to profit from an earthquake. There is a huge difference between those two things; one is passive, and one is active.

I'd like you hear from our readers on this one; what do you think? Is it wrong to create trades that are specifically designed to profit from disasters, natural or otherwise? Or as traders, is it just our job to place the trades and ring the register, regardless of the circumstances? Let me hear your opinions at info@fxeducator.com

Read and Grow Rich

2008-09-09T13:34:00.000-07:00

Read and Grow Rich

Greetings from Acapulco! It's cloudy, wet, and humid, not exactly great beach weather, but it's a perfect time to follow up on last week's article and answer a great question from a reader. Keep those questions coming!

In last week's article, titled "Deadly Hurricanes and Dangerous Assumptions", we discussed at length the reasoning behind shorting the Great Britain Pound and going long the Japanese Yen (GBP/JPY). The idea was to short the weakling of the group (GBP, which has been falling relentlessly) and go long the Japanese Yen, which is the only currency other than the U.S. Dollar that has been performing well recently. Please note that when that article was written on September 1 (published on September 2), the GBP/JPY pair was trading at a major support level, at about 195.50, as indicated on the Figure 3 chart from last week's article. Also indicated was a potential catalyst for a break of that support level, in the final sentence, "The Japanese Yen tends to perform well when equities markets perform poorly, so if recent stock market weakness persists, look out below."

Look out below, indeed. Now it is Friday, September 5. Take a look at the "Last" price on the weekly chart, and I guess it's safe to say that support has broken. The last price just under 188.00 indicates a gain of about 750 pips this week. The low price of 186.01 indicates that at one point, the weekly gain was about 950 pips. It's time to ring the register. Hey, it beats working for a living!

I've already heard from some of you who sold GBP/JPY short after reading last week's column, and while I appreciate all of your kind comments and praise, I want you to know that you deserve all of the credit – congratulations! Whenever we take a trade, the credit or the blame always goes to the person who hit the button or clicked the mouse. Trading is not a good business for those who do not take responsibility for their own actions, but it's a great business if you have the ability to stand up and admit when you're wrong – and there is nothing wrong with taking credit when you're right. If you hit the button, then you deserve the credit for those times when you win, just as you deserve the blame for those times when you lose.

More Ammo for GBP Bears

In the Forex market, there is a clear connection between technical and fundamental analysis that does not exist in the stock market. The technical weakness in GBP/JPY that was indicated on the charts is backed by fundamental information. At the same time that the chart was breaking down, the OECD released its predictions for growth in the third and fourth quarters of 2008. The OECD is the Organization for Economic Cooperation and Development, which describes itself as an "international organization helping governments tackle the economic, social and governance challenges of a globalised economy". Interestingly, they picked Japan to have the strongest growth of any G7 country, while predicting a recession for the United Kingdom. The U.K. was the only G7 country to receive that distinction.

Under these circumstances, it shouldn't be too surprising that the Yen has the British Pound on its heels, and one could say that the Yen is fundamentally - and technically - stronger than the Pound. Even if the OECD's predictions turn out to be inaccurate, they are a respected organization and their opinion carries some heavy weight. For more on the OECD, visit their website at http://www.oecd.org.

Deadly Hurricanes and Dangerous Assumptions

2008-09-02T10:30:00.000-07:00

In this week's newsletter, we explore questions about the currency market's reactions to past disasters - the reactions may surprise you. Also, answers to more of your email questions.

CLICK HERE TO READ THE ARTICLE

Forex Q&A with Ed Ponsi

2008-08-26T17:18:00.000-07:00

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!

The Dollar Continues to Roll

2008-08-19T19:11:00.001-07:00

The Dollar Continues to Roll

In last week's article, I mentioned that the sharp move lower in the Euro – U.S. Dollar currency pair (EUR/USD) still had room to run, and that "Euro has a very good chance to break this new support level" (near 1.4950) based on the velocity of the move. You could also add to that the fact that the weekly candle closed near its low, signifying that shorts were unwilling to take profits going into the weekend. Well, here we are one week later, and the EUR/USD currency pair is now nearly 300 pips lower than it was at last week's close. Not only that, but once again the weekly EUR/USD candle closed near its lows, once again indicating that shorts remain reluctant to take profits, and sellers may have still more inventory of Euros to unload (see figure 1).

Figure 1: EUR/USD continues to fall hard on the weekly chart. Source: Saxo Bank

The next major support levels appear to be 1.4500 (psychological) and 1.4350 (old support from late 2007 – early 2008). The velocity of the move shows near panic on the part of sellers, some of whom are trying to protect the huge profits they made buying Euros on the way up. As you can see from the weekly chart in figure 1, many Euro longs may still be holding on to profitable positions despite the vicious pullback of the past two weeks. This just goes to show how long and persistent trends in the Forex market can be.

Question of the Week

Q) Hi Ed, I read your articles every week and I always learn something new, thank you so much! In last week's article, you mentioned that Forex volume is so high that it would be impossible to count all of it, yet in the same article you mentioned that the daily average volume in the Forex market is $3.1 trillion USD per day. Forgive me if I'm missing something, but if the volume is so high that nobody can keep track of it all, where does that $3.1 trillion figure come from?

Ed Ponsi) Thank you for your kind comments and for your question. It's true that Forex volume is so high that accurate volume figures are not available, but every three years, the Bank of International Settlements (BIS) surveys major Forex market participants and then creates a volume estimate based on the information gathered. The most recent BIS survey, completed in 2007, yielded the estimated volume figure that I reported last week as $3.1 trillion (turns out it's actually closer to $3.2 trillion), a figure that is widely quoted and accepted. This figure represents an increase in volume of about 70% from the 2004 survey. According to the BIS, the $3.2 trillion average daily volume is equivalent to:

The survey even breaks down volume figures by geographic location. The United Kingdom continues to dominate the Forex markets, as it is home to many large banks and funds that are prominent players in the world of currencies. These stats only serve to reinforce London's reputation as the world's capital of Forex trading (see figure 2):

Figure 2: Breakdown of daily volume figures by location. Source: BIS Triennial Survey 2007

Finally, the Bank of International Settlements offers a volume breakdown by currency pair. Note that EUR/USD has the greatest volume by far; it's not a coincidence that this currency pair has the tightest spread on nearly every Forex trading platform. Generally speaking, high volume leads to tight spreads in the Forex market (see figure 3).

Figure 3: Breakdown of daily volume figures by currency pair. Source: BIS Triennial Survey 2007

Question of the Week, Part ll

Q) Regarding finding good volume information, you recently wrote:"...If a breakout occurs during a time of day when volume is known to be high, it would be reasonable to assume that the breakout is occurring on high volume; if it occurs during a time of day when volume is known to be low, the opposite would be true." What are those "known" times of day? Opening of markets, etc.?

Ed Ponsi) Thank you for your question. As you mentioned, the opening of markets, in other words morning in any given geographic location, is the time of day when the bulk of trading is done. For example, referring to the image in figure 2, more volume is generated in the U.K. than in any other location. So, it stands to reason that when it is morning in London, volume tends to be high. You could also say the same thing about the U.S., which is second only to the U.K. in Forex trading volume. Since morning in New York coincides with lunchtime in London, it is reasonable to assume that just as things are settling down a bit in the U.K., traders in the U.S. wake up and start trading. Also, most economic indicators are released in the morning, so this creates added volatility and can also attract added attention from traders. So, if a breakout occurs when it is morning in the U.S. and/or the U.K. – anywhere from 3 a.m. to noon New York time - then I would assume that the volume is likely to be high.

On the other hand, what if a breakout occurs at 5 pm U.S. East coast time? Well, that is a pretty quiet time of day in the U.S., as most New York traders are on their way home or having dinner. When it is 5 pm in New York, it is 10 pm in London, so I wouldn't expect too much activity from traders in the U.K. Also, when it is 5 pm in New York, it is only 5 am in Singapore and 6 am in Tokyo, too early for any meaningful activity from these Asian trading capitals. Taking all of this into account, I would assume that a breakout that occurs at 5 pm New York time is occurring on low volume and has a high likelihood of failure.

The Homer Simpson Breakout

2008-08-12T14:17:00.000-07:00

Last week saw a breakout of historic proportions, as the U.S. Dollar got up off of the mat and roared higher across the board, crushing everything in its path. Here we see the Euro – U.S. Dollar currency pair (EUR/USD) crashing back to earth on the weekly chart after hitting a new lifetime high above 1.6000 just a few weeks ago. The pair has found support at a former level of resistance from late last year (see figure 1).

Figure 1: EUR/USD plunges from a failed ascending triangle. Source: Saxo Bank

Looking at the chart, I'd have to say the Euro has a very good chance to break this new support level and continue lower, just based on the sheer velocity of the move. An awful lot of people made an awful lot of money on the Euro uptrend, and now it's time for them to ring the register.

If you are a regular reader, you know that this is a bittersweet moment; as an American, I'm happy to see my currency strengthening, as I've been constantly railing against the weak USD in articles such as this one, titled The US Dollar and the Thief in the Night. Because of that piece I was invited onto Larry Kudlow's show on CNBC. But is the greenback really doing all that well, or is this just a case of the Euro and other currencies doing poorly? To find out, let's look at the hourly chart and pinpoint the genesis of this move. The Euro began to fall in earnest around 9:00 am New York time on August 7, right at the time when European Central Bank chief Jean Claude Trichet said that European economic growth would be "particularly weak" through the third quarter (see figure 2).

Figure 2: Trichet speech ignites the USD rally as the Euro gets crushed. Source: Saxo Bank

So last week's big move is not a vote of confidence in the U.S Dollar; instead, it shows a lack of confidence in the Euro. Still, the tide has turned at least for now, so don't try to fight this move. Also, don't feel too bad for traders who were short the greenback for most of this year, myself included. The weak USD trend has been my friend for quite a while, and it's sad to say goodbye to that friend for now. Until now, this year has been one of the best in memory for USD shorts. Right now it is too early to tell, but if a new trend of USD strength emerges, you can bet trend traders will be riding it.

Why the Euro REALLY Fell…

A one euro coin has turned up in Spain bearing the face of Homer Simpson instead of that of the country's king, a sweetshop owner told Reuters on Friday. Jose Martinez was counting the cash in his till in the city of Aviles, northern Spain, when he came across the coin where Homer's bald head, big eyes and big nose had replaced the serious features of King Juan Carlos. "The coin must have been done by a professional, the work is impressive," he told Reuters. "I've been offered 20 Euros for it."

The Learning Curve

2008-08-05T09:36:00.000-07:00

The Learning Curve

Hola from Mexico City! I have another great question from a reader this week. Hopefully the answer will help prevent some of you from making the same mistakes I made when I got started in trading. Read on!

Question of the Week

Q) Mr. Ponsi, I found your response to the automated system very interesting. I am in the process of training myself for the Forex....hopefully in the correct way. I realize as well (having worked with a demo account) that you can be "punished" if you do not know what you are doing!

I would like to know how YOU got to be where you are. Did you have struggles? How long was it before the "light bulb" went off in your head? I consider myself an intelligent person; I am a physician and have had extensive training, 12 years beyond college. How long was it before you felt comfortable with what you were doing? I have heard some say six months. Of course no one can truly predict where the market will go after you get in and I have heard statistics that even the best Forex traders are correct 50-70% of the time. Do you feel bad when your trades go the wrong way or have you disciplined yourself to extract from the emotion?

Ed Ponsi) Thank you for your question. I started out as a part time stock trader in the mid nineties, and I freely admit that at that time I had no idea what I was doing. Luckily for me, I began my trading career at the beginning of the biggest bull market in history – at a time when all you had to do to make money was buy tech stocks and watch them skyrocket. There was a popular saying at the time, "don't confuse brains with a bull market". After making money on my own for a few years, I realized that I was not yet a good trader, just fortunate to be in the right place at the right time. If I wanted to make a career out of trading, I was going to have to learn how to do it properly.

Determined to succeed, I went about the task of getting hired on Wall Street. After months of emailing my resume and trading record to every Wall Street firm that I could find, I finally got an interview, and I was hired. Let me tell you, it wasn't Goldman Sachs. I was hired by what is called a "boutique" trading firm, based on my trading record for the previous two years, and because of my determination. Part of that determination was my willingness to travel over 100 miles each way, every day, to get to work.

The beautiful thing was, this firm was a meritocracy – you rose or fell based on your performance. Unfortunately, most of us fell. I was one of a group of 20 that was hired. What I didn't know at the time was the firm expected most of us to fail, they were just hoping that one or two of us would pan out. The next month, there would be 20 more new hires, and 20 more the month after that. Out of all of these new hires, only a handful of us were expected to survive.

And so I began. I was confident, having done very well for myself in the two prior years, despite my lack of real trading knowledge. My new employers gave me a blueprint for success and put restrictions on my trading, using good risk management rules. I had never even heard of risk management up to that point, and I soon learned that it would be the key to success. My instructions were simple; I was to have no large losses, period. This was a big change from my prior freewheeling style, but I was trading their money and I wanted to do it right, so I set about taking small losses.

The next two months were psychological torture, as I could not seem to reconcile my old style of trading to the new, stringent risk rules that were imposed upon me. During that time, I couldn't sleep and I could barely eat. It really bothered me that I was losing, and it bothered me even more that I was losing someone else's money. After surviving the dreaded "learning curve", I finally began to win and I never looked back.

Why did the firm stick with me during this difficult time? Because they monitored my actions closely, they could see that I never took a large loss – no matter what. They knew that the ability to avoid large losses is the most important skill in trading. Since I already knew how to lose like a professional, it was only a matter of time until I learned how to win like one. Once I learned how to hang on to my winners, the account balance began to rise, and I never looked back. It was a long two months, but life was never the same after that.

Do I still feel bad when trades go the wrong way? A little, but I understand that my feelings don't matter, and that losing is a part of winning. I'm not going to change my tactics if I have a few losses, because those techniques have worked for me for many years. Small losses lead to large gains, as I learned long ago; in fact, small losses are a necessary ingredient to winning. If I see someone who is not taking small losses, or a trader who never seems to lose, I know that person is setting himself up for a big loss.

It's true that markets are unpredictable, and that's why we have to use a stop on every trade, without exception. One of the things that I learned on Wall Street is that nobody is right all of the time; that is just fantasy. The beautiful part of trading is you don't have to have a crystal ball or the ability to see the future in order to make money as a trader. You create your analysis, put on your best trade, and if you're wrong, get out. On the other hand, if you're right, know how to maximize the gain. If you use this philosophy, win-loss percentage becomes meaningless. There are many successful traders who have unimpressive win-loss percentages, but it is not our job as traders to be right. Our job is to lose small when we're wrong, and win big when we're right

Scamming the Scammers

2008-07-30T07:45:00.000-07:00

Scamming the Scammers

Greetings from Acapulco! It's a beautiful Sunday afternoon; the birds are chirping as a tourist goes parasailing effortlessly above the beautiful blue bay. I'm enjoying the view from our terrace, sorting through email when I came across something that sounded a sour note on an otherwise perfect day…

Question of the Week

Q) Mr. Ponsi, I am very interested in the Forex market. I have some money that I would like to put into an active account but I can't get my demo account to make any money. I started with an automated trading company that shall remain nameless (E.P.) first. It was supposed to win more than lose. I didn't find that to be true. Then I read some stuff about financial calendars, they listed the times of the news conference but by the time I got to place my trade I had missed the spike. I really don't feel comfortable sinking my money in an account when I can't seem to make play money in the demo account. Can you help me?

Ed Ponsi) Yes, I can help you – don't do it! If you're not comfortable putting money into an account, then there is a good reason for that discomfort. In your case, the reason seems to be that you haven't learned how to trade yet – and that's the best reason imaginable to stay out of the currency market or any trading market. Don't rely on automated systems or signal services, they almost always promise more than they deliver. Instead, learn how to make the right trading decisions on your own, you'll find that it is much more rewarding.

Automated trading systems like the one you mentioned tend to be more hype than substance. Because Forex is relatively new to the retail trading public, scammers who make unrealistic promises are becoming a constant nuisance. Here's a good rule of thumb, and it doesn't matter if you're trading stocks, futures, options, or Forex – If anyone promises outlandish returns, don't believe it; it's probably a scam. For example, the website you mentioned claims returns of nearly 500% in 2005, nearly 700% in 2006, and nearly 1000% in 2007. Just based on these so-called returns, this website has scam written all over it.

A quick glance at the disclaimer page yields yet another huge red flag, waving in the breeze: "No independent party has audited the hypothetical performance contained at this website". The word "hypothetical" should set alarms ringing, because this means that those supposedly lofty returns from the years 2005, 2006, and 2007 never actually occurred – they are "hypothetical" returns. This means that the system currently in use would have yielded those results back during those years, if it had been used. But it wasn't used, because if it had been, the returns would be "actual" instead of "hypothetical". What the operators of the website are doing is predicting the past. Now, watch me predict the past with astonishing accuracy: I hereby predict that the New York Giants won last year's Super Bowl. I predict that it rained last Tuesday. I predict that the movie "Batman: The Dark Knight" will have a record breaking opening weekend. I can even give you last week's winning lottery number!

If you were to grade me on my predictions of things that have already happened, you'd have to say that I'm very accurate. You'd also have to admit that the information is useless, unless you have somehow acquired the use of a time machine. Hypothetical returns are the backbone of any trading scam, so search every page of the website, especially the disclaimer, for that word. The website's operators are hoping that you will be so excited by your desire to receive big money without effort that you will be negligent in the performance of your due diligence.

Here is another red flag, in the form of a quote from the website's homepage, "Also you can be absolute newbie to use our system - you don't have to know ANYTHING about trading and you don't have to have ANY experience." Two things stand out here; first, the promise of easy money with little or no effort. Ask any real trader and he or she will tell you that trading is not an easy job, but the public can be easily led to believe that it's all very simple, and that no real effort is required. Even though deep down we should know that this is a false promise, much like fictional FBI agent Fox Mulder of the X Files, we want to believe, and this is what makes the scam so effective. Scams of this nature are meant to appeal to the public's sense of greed. The promise of easy money is a hallmark of all scams, not just in the world of trading.

Another thing that caught my eye was the poor use of the English language in the phrase, "you can be absolute newbie". As a rule, I delete all spam without opening it, but sometimes I do read the email subject headline. I don't know about you, but I am inundated with spam that is written in poor English, and I assume that most of those who spam, scam. I am not saying that poor usage of the English language necessarily makes one a scam artist, but it does seem that many scam artists do not have a good handle on the language, so consider it a warning sign when combined with the other red flags mentioned above.

Summary

Ralph Kramden. Homer Simpson. George Costanza. One of the staples of television entertainment is the lovable loser, the person who always seems to be hatching some crazy get-rich-quick scheme. The result is always the same; every episode ends with the scheme blowing up in our protagonist's face. While we may find it entertaining to watch these fictional personalities in action, we don't want to BE that person. It has been said that when opportunity knocks, it is often disguised as hard work. Well, when a scam comes knocking, it is often disguised as easy money. Real trading is hard work, but it can be enormously rewarding if you are willing to do what it takes to learn the business.

Why do I find these scams so irritating? Because innocent people who have a legitimate interest in learning how to trade are being taken advantage of, and because it sullies the reputation of the good guys that are out there. I hope this exercise has been helpful. Let's be careful out there!

Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.

Doctor Evil Would Be Proud

2008-07-22T09:09:00.000-07:00

Doctor Evil Would Be Proud

With an official inflation rate of 2,200,000% (2.2 million percent), Zimbabwe's central bank has now introduced the $100 billion dollar bill. I can just hear Mike Myers as Dr. Evil shouting "One Hundred Billion Dollars!" Unfortunately, Zimbabwe has its own, real life version of Dr. Evil, as we will see in a minute. Inflation is so high in Zimbabwe that the supply of money just can't keep up with the cost of goods. For example, while it may sound appealing to have a net worth of $100 billion dollars, in Zimbabwe this amount is not enough to purchase a single loaf of bread! The new Zimbabwe $100 billion dollar bill is roughly equal in value to one U.S. dollar.

The Zimbabwean central bank, the Reserve Bank of Zimbabwe (RBZ), has mismanaged this hyper-inflation and has ignored advice from the International Monetary fund (IMF), instead choosing to print money as if it were toilet tissue (which went for $417 per sheet, not per roll, in March of 2006, according to a New York Times article). As more money is added to the supply, the value of each individual unit of currency falls, until the currency becomes worthless. Sound familiar? This is happening right now on a much smaller scale in the U.S., leading former Presidential candidate Steve Forbes to refer to current U.S. monetary policy as "Zimbabwe economics".

What is the solution? Well, inflation can be caused by too much money chasing too few goods, and one possible solution would be to increase the number and amount of goods produced. The other, more obvious solution would be to decrease (or at least stabilize) the supply of money. Unfortunately, this is easier said than done. This is especially true when your leader is President Robert Mugabe, who has ruled the country for 28 years and was recently condemned by the international community for waging a campaign of violence against his political opponents. Mugabe's main opponent, opposition leader Morgan Tsvangirai, withdrew from last month's election after alleging his supporters were being targeted in a state-sponsored campaign of violence. Mugabe is now threatening to loot businesses owned by foreigners, especially from the U.K., blaming them for his country's economic woes.

The Mugabe regime's economic mismanagement has already led to a 10-year recession (source: International Monetary Fund) and an unemployment rate of nearly 80%, and will undoubtedly cause more pain and suffering to millions of Zimbabweans for years to come. A just-published study by Long Island University researchers measuring economic opportunity and quality of life in over 100 countries shows Zimbabwe coming in dead last. Iceland was number one, Canada was second, and the U.S. came in 11th. For the full list and an explanation of the criteria, please visit:

http://www.cwpost.liu.edu/cwis/cwp/pr/press/2008/117.html

And to those among my fellow Americans who smugly believe that it can't happen here? Well, it can – in fact, it already has happened here. Continental currency was a paper currency issued by the Continental Congress, after the Revolutionary War began in 1775. With no solid backing and being easily counterfeited via printing press, the continentals quickly lost their value, giving voice to the phrase "not worth a continental". It was eventually replaced by the silver dollar at the rate of 1 silver dollar per 1000 continental dollars. Finally, in 1792, the Mint Act was passed, and the dollar was pegged to silver and gold, putting an end to this nonsense for good.

Or so it seemed. The so-called "gold standard" effectively came to an end in 1933 when President Franklin D. Roosevelt outlawed the private ownership of gold. Without a gold standard, governments can print as much money as they want, destroying wealth through inflation. Here is a great quote from a man who was, at least at one time, clearly in favor of a gold standard:

"Under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth... The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation."

Alan Greenspan, 1966

Any enormous increase in prices threatens to impoverish the agricultural and working class of that country. Because inflation wreaks such havoc on the quality of life in any given country, major central banks like the ECB (European Central Bank) have made the containment of rising prices their primary mission. Federal Reserve Chairman Ben Bernanke said last week that U.S. inflation "is too high" and reiterated that the Fed's aim is to achieve price stability, but so far it's been all talk and no action. Only time will tell if we will see some serious movement on this front.

Awesome Aussie

2008-07-17T03:57:00.000-07:00

The Australian Dollar continues its march to parity,plus your questions on Pivot Points, in this week's newsletter.

CLICK HERE TO READ THE FULL ARTICLE

Ed Ponsi at the L.A. Traders Expo

2008-07-14T19:13:00.000-07:00

Hey Everybody,

Here are three short videos from the Los Angeles Traders' Expo:

Dollar Intervention?
Author and currency trader Ed Ponsi doesn't expect to see concerted central bank
intervention to support the struggling US dollar.

Commodity Currencies
Author Ed Ponsi updates his bullish outlook on the Australian dollar from both a
fundamental and technical perspective.

Euro/Yen?
Though the carry trade has been dormant for quite a while current traders, like Ed
Ponsi, are watching the EuroYen

It's a Mad, Mad, Mad, Mad Forex World

2008-07-08T20:44:00.000-07:00

In a market that is driven by news such as the Forex, it's important to stay on top of current events. Thursday was a wild, wild day in the currency markets, featuring the simultaneous release of two hugely important market moving events - the monthly non-farm payroll report, and a speech by the head of the European Central Bank (ECB), Mr. Jean Claude Trichet. How do the pros deal with a wild day like this one? Read on and find out.

CLICK HERE TO READ THE FULL ARTICLE

Video from ForexTV

2008-07-03T03:34:00.000-07:00

Topics: The ECB and Fed rate decisions, future targets for Euro, British Pound, and Japanese Yen, and more. This appearance on ForexTV includes a strategy for trading currencies that uses the S&P 500 as a leading indicator.

CLICK HERE TO VIEW for the Youtube link to view this recent 9-minute television appearance. With host Remi Hoki

At My Signal, Unleash Hell

2008-07-01T20:05:00.000-07:00

From sea to shining, sea, U.S. politicians continue to bash traders and blame them for high energy prices. A variety of bills have been introduced that are designed to limit the amount of money that hedge funds can invest in energy, reduce foreign trading and even put an end to energy speculation altogether. Do these politicians have even a basic understanding of how the futures market operates? "No, they're clueless - at least most of them," said former U.S. Commodities Futures Trade Commission chief economist Gerald Gay in a recent Fortune magazine article about oil speculators.

Here's a thought - instead of discouraging speculation, which is a necessary ingredient to provide liquidity in any market, why not instead encourage those speculators to sell and drive prices lower? If you give traders a good enough reason or reasons to sell, they'll do it. Instead of trying to eliminate speculation, why not use it as a weapon to drive prices lower?

Here's what I mean. Remember the movie "Gladiator"? In it, Russell Crowe plays the general Maximus, who gives the order, "At my signal, unleash hell," thus initiating a series of actions that drive the enemy into disarray, retreat, and defeat. Imagine a day in the not too distant future, when the following series of synchronized events are unleashed on unsuspecting commodity traders:

11:00 am: Ben Bernanke and the Federal Open Market Committee shock the markets with a surprise 50-basis point rate hike, sending the U.S. Dollar rocketing higher, and causing oil prices to plunge.

11:01 am: The U.S. Department of Energy announces that it is suspending its policy of adding supply to the Strategic Petroleum Reserve, and will in fact release some of the oil from the SPR into the open market. The drop in the price of oil accelerates as panicked traders begin to cover long positions.

11:02 am: Saudi Arabia announces that it will add 800,000 barrels per day of supply to the market in addition to the 200,000 bpd increase that was announced last week. Sensing a rout, traders sell short energy contracts by the fistful, driving the price of oil to its worst one-day loss in history.

Can you imagine the market reaction that would ensue from this orchestrated series of events? Within three minutes, traders would panic and bail out of their positions, creating an avalanche of selling that would collapse oil prices. While it certainly wouldn't be easy to choreograph these specific events, I'm sure that with a little creativity and a lot of motivation and cooperation, a similar series of surprises can be arranged. If speculators truly are driving energy prices higher – and it's debatable whether they are - then they have the ability to drive them lower as well. Let's give them a reason to do so.

Forex Question of the Day

2008-06-25T08:04:00.000-07:00

Q) Hi Ed, thanks for the great insights. Question regarding timing - are there better times of the day to trade certain pairs? For example GBP/JPY appears to have tremendous moves starting at 3:30 am eastern time, hard for some of us to keep up at that hour. So are there better pairs to trade after dinner time on the east coast between 7 pm & 11 pm eastern time. I say evening because I am not a full time trader yet, still need to pay the bills with a day job. Your guidance is greatly appreciated.

Ed Ponsi) Thank you for your email. The reason why you are seeing big moves in the Great Britain Pound – Japanese Yen currency pair (symbol GBP/JPY) at that hour is because when it is 3:30 am in New York, it is 8:30 am in London. London is the world's capital of Forex trading, accounting for approximately 30% of all trading volume, and when those big traders wake up and start throwing their weight around, the market responds with volatility. Also, U.K economic indicators are often released at that time of day, adding to the overall climate of high volume and volatility.

Here's a recent example; on June 19, 2008, U.K. Retail Sales figures were released for the month of May. The record monthly increase in sales of 3.5% was far above the estimate of -0.1%, and the Pound rocketed higher against a variety of currencies, including the Japanese Yen, as a result. Please note that this chart is notated in Greenwich Mean Time, which is currently four hours ahead of New York time – meaning that the move occurs at about 4:30 am Eastern time. GMT is used frequently by Forex traders because of the international nature of the currency markets (see chart).

Does this mean that we have to get up at 4:00 am to trade Forex? No, but some people do. I used to get up very early to trade, but I think I've found a better way. Instead of focusing on time of day, I focus on price – every trade I place has a specific entry price, protective stop price, and at least one specific exit price. Since the trades are based on price and not time, I really don't care what time of day they execute – the only thing that matters to me is that I get the price that I want.

Many currency pairs are active during the Asian session, which begins around 6 to 7 pm Eastern time. For those who live on the U.S. East Coast and work normal hours, this is an excellent time of day to trade Forex. The main Japanese Yen pairs (USD/JPY, EUR/JPY, GBP/JPY) tend to be very active at this time of day, as well as major pairs such as EUR/USD and GBP/USD. The Australian Dollar and New Zealand Dollar pairs also enjoy an increase in activity. The action tends to fade after midnight Eastern (New York) time, and things get quiet until – you guessed it – around 3:00 am Eastern time, when European and U.K. traders get back in the game. Good luck!

Oil and the U.S. Dollar

2008-06-24T09:20:00.000-07:00

Hey Everybody,

I have a great question from a reader to share with you, dealing with last week's article on the relationship between oil and the U.S. Dollar. If I didn't get to your question this week, don't worry, I'll get to it soon. Keep 'em coming. Let's get to it!

Q) Thanks for your informative article, but I'd like to ask, why have the oil producing countries been reluctant to switch from the dollar as the trading currency despite this loss of value to a more stable currency like the euro? Also some countries including China have been threatening for quite some time now to scale their USD holdings to euro, but they are not doing it. What's the big deal? If they did this the dollar would greatly appreciate.

Ed Ponsi) Thank you for your question. Actually, if China and the oil producing countries move away from the USD, this would accelerate the U.S. currency's decline. Imagine that you own tens of millions of shares of a stock that just keeps declining in value. You want to sell your shares, but you are concerned because if you begin to sell in large quantity, you will drive the price lower due to the size of your position. Also, if the market catches wind that a large seller is dumping shares, other traders will sell their shares, possibly causing the stock to collapse.

This is similar to the situation that many countries now find themselves in regarding the greenback. Many of the oil producing countries are flush with U.S. Dollars, which the U.S. has sent to them in return for their oil. China holds over 1.3 trillion dollars worth of foreign reserves, most of it in U.S. Dollar denominated assets. These countries dislike the fact that the USD keeps falling, but they are caught between a rock and a hard place – if they sell in meaningful quantity, they will depress the dollar even further, and lower the value of their holdings. Also, many of the Middle Eastern currencies, such as the Saudi Riyal, the United Arab Emirates Dirham, and the Jordanian Dinar, are pegged to or closely mimic the U.S. Dollar. So if panic selling occurs in the U.S. Dollar, these currencies will suffer as well.

In fact, while the Saudis have made it a point not to emphasize the weakness of the U.S. currency, other world leaders less friendly to the U.S. are laughing with glee at the demise of the dollar. The only OPEC countries that have officially endorsed moving away from accepting U.S. Dollars in exchange for oil are Venezuela and Iran – not exactly good friends of the United States. Iran's Ahmadinejad, who in the past has called the dollar a "worthless piece of paper," and Venezuela's Chavez want to dump the USD in part because it would injure the currency further, thus damaging the prestige and power of the U.S. If that is not a reason for the United States to protect the value of its currency, I don't know what is.

Forex Q&A With Ed Ponsi - The Oil Question

2008-06-17T20:39:00.000-07:00

Q) Hi Ed, your articles are always eye openers; at the risk of sounding dumb I'll ask the following. I don't understand why oil prices should rise with a weak dollar. As far as I understand prices are set by supply and demand of the commodity, so where does the dollar fit in?

CLICK HERE TO READ THE FULL ARTICLE

The Candy Man

2008-06-10T15:00:00.000-07:00

By cutting interest rates to the bone and pumping the markets full of liquidity, Ben Bernanke may have saved the U.S. financial system from incurring even greater damage than it has already suffered. In the process, the U.S. Dollar has been degraded to levels that have not been seen in decades. After all the damage that has been done, last week's action has traders wondering if the man who has been feeding candy to the markets is now about to sing a different tune.

CLICK HERE TO READ THE ARTICLE

Battered and Bruised

2008-06-03T10:08:00.000-07:00

It was a manic Monday for the British Pound, plunging hundreds of pips against major currencies on word of new troubles in the lending sector. Mortgage lender Bradford and Bingley, popularly known as B&B, is in serious trouble, and is selling off a huge chunk of its business in an effort to remain afloat. The news hit the British Pound hard, sending the currency spiraling to a 300 pip loss vs. the Japanese Yen in the space of three hours...

CLICK HERE TO READ THE FULL ARTICLE

The Ultimate Indicator (Book Excerpt)

2008-05-26T12:33:00.000-07:00

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

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

CLICK HERE TO READ THE ARTICLE

Not Exactly Margaritaville

2008-05-21T08:00:00.000-07:00

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

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

Just Kiss Already!

2008-05-19T02:44:00.000-07:00

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

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

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

Is Gold Losing It's Glitter?

2008-05-09T18:38:00.000-07:00

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

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

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

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

Will the US Dollar Rally Continue?

2008-05-06T16:27:00.000-07:00

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

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

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

The Straits Times Interview Pt 1

2008-05-04T14:44:00.000-07:00

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

His best investment move: short-selling the US dollar

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

By Lorna Tan Finance Correspondent

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

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

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

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

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

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

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

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

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

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

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

Ed Ponsi Guest Hosts CNBC Asia Squawk Box Again

2008-04-29T19:27:00.000-07:00

Highlights from April 25 CNBC Asia appearance:

Gold might drop below $800, according to Ed Ponsi, president of EdPonsi.com. He charts spot gold, as well as the Swiss franc-yen and New Zealand dollar-yen crosses.

http://www.cnbc.com/id/15840232?video=722343953&play=1

At a viewer's request, Ed Ponsi, president of EdPonsi.com pulls out the chart on Straits Asia Resources, with CNBC's Martin Soong.

http://www.cnbc.com/id/15840232?video=722319135&play=1

The Taiwan Weighted Index is set to see more upside based on what the charts say. Ed Ponsi, president of EdPonsi.com shares his analysis with CNBC's Arnold Gay.

http://www.cnbc.com/id/15840232?video=722477258&play=1

Ed Ponsi, president of EdPonsi.com charts Vanke, at CNBC's Cheng Lei's request.

http://www.cnbc.com/id/15840232?video=722343983&play=1

Forex Q&A with Ed Ponsi

2008-04-29T19:09:00.000-07:00

Greetings from high above the Pacific Ocean! I'm on the flight home after two wonderful weeks in Singapore. One of the highlights of the trip was Friday's two and a half hour appearance on CNBC Asia's Squawk Box, where I charted currencies, stocks, commodities and indexes live on the air in response to viewer emails.

While I've been here in Singapore a few of you have sent in some interesting questions, so let's begin…

CLICK HERE TO READ THE FULL ARTICLE

Coincidence? I Think Not

2008-04-23T05:11:00.000-07:00

Hello from Singapore, the Lion City! As usual, things are happening here – the town is abuzz over the official opening last week of the Singapore Flyer, billed as the world's largest observation wheel. In addition, the first ever Formula One night race will be held here this summer. Perhaps you caught me last Tuesday guest hosting CNBC Asia's flagship program, Squawk Box. I'll be guest hosting the show again this Friday.

CLICK HERE TO READ THIS WEEK'S NEWSLETTER!

Ed Ponsi Guest Hosts CNBC, Parts Five and Six

2008-04-15T15:52:00.000-07:00

Aussie-Dollar Parity?
If the Aussie-dollar cross breaks above $0.95, the next stop is parity, according to Ed Ponsi, president of EdPonsi.com. He also charts the Nikkei 225 index, JPMorgan Chase, Citigroup and the Singapore dollar cross rates.

Growth vs. Inflation
With the U.S. set to release its inflation data later Tuesday, the Fed will remain focused on growth rather than inflation, says John Horner, FX strategist with Deutsche Bank. He talks to Ed Ponsi, president of EdPonsi.com, CNBC's Martin Soong, Amanda Drury & Sri Jegarajah.

Ed Ponsi Guest Hosts CNBC, Parts Three and Four

2008-04-15T15:45:00.000-07:00

Charting US Bellwethers
Ed Ponsi, president of EdPonsi.com charts Intel and Merrill Lynch, ahead of their earnings reports this week. He also tracks spot gold and the dollar-Swiss franc cross, with CNBC's Amanda Drury, Martin Soong & Sri Jegarajah.

Capitalizing on Volatility
The Singapore Exchange posted third-quarter profits of S$1.1.5 million, below estimates. But its CFO, Seck Wai Kwong tells CNBC's Amanda Drury, Martin Soong & Sri Jegarajah the SGX will thrive in these volatile times & shares his exchange consolidation strategy. Ed Ponsi, president of EdPonsi.com also charts the SGX.

Ed Ponsi Guest Hosts CNBC, Parts One and Two

2008-04-15T15:19:00.000-07:00

Although I've appeared on the network as a guest in the past, today marked my first time as a guest host on CNBC. I had a great time with the staff and guests during my two-hour guest hosting stint, and I've been invited to return in the same capacity soon. Here are some links:

Weak Earnings from US
Michael Yoshikami, founder & CIO of YCMNET Advisors and Ed Ponsi, president of EdPonsi.com discuss what they expect from the markets this week after Wachovia and GE's dismal earnings, with CNBC's Martin Soong, Sri Jegarajah & Amanda Drury

Next Key Level for Oil
$120-125 a barrel is the next key level for oil prices, says Ed Ponsi, president of EdPonsi.com, following crude's record close overnight. Michael Yoshikami, founder & CIO of YCMNET Advisors also tells CNBC's Amanda Drury & Sri Jegarajah there will be more upside for soft commodities.

Greetings from Singapore!

2008-04-15T09:56:00.000-07:00

Greetings from Singapore! This week, it's all about language; the language of the Fed, the language of the CEO of a major U.S. corporation, and the language of the Group of Seven Industrialized Nations, better known as the G-7. As we'll see, the ability to interpret what is being said – as well as what is not being said – can give traders insight into the markets. Enjoy THIS WEEK'S NEWSLETTER!!!

Crushing It!

2008-04-08T09:43:00.000-07:00

Hello from New York! Vacation is over, so I'm back in the Big Apple making the rounds on the financial news networks. We have some great questions this week, so let's get right to it! I hope you enjoy THIS WEEK'S NEWSLETTER!!!

Average Joe, the Ted Spread, and Pistachio Ice Cream

2008-04-02T18:13:00.000-07:00

Greetings from Acapulco! The skiing in Colorado was great, but we needed a nice place to warm our toes. I'm still sifting through your backlog of questions, and I just want to say thanks to all of you for your overwhelming response. I've also noticed that the questions are becoming more diverse and sophisticated, which says a lot about you, the readers. Enjoy THIS WEEK'S NEWSLETTER!!

Forex Q&A with Ed Ponsi

2008-03-25T13:52:00.000-07:00

It seems that while I've been carving my way through the freshly fallen snow, you've been sending in your questions - this week we'll cover how to choose a money manager, why markets are forward-looking, keeping your portfolio non-correlated, and much more.
I hope you enjoy THIS WEEK'S NEWSLETTER!!!

Greetings From Colorado!

2008-03-21T18:53:00.000-07:00

Writing to you from Breckenridge this week, where the beer is cold, the hot tub is hot, and the powder is deep. This week, we explore Ben Bernanke's actions and their impact on the US Dollar. Enjoy THIS WEEK'S NEWSLETTER!

More Feedback Than Hendrix at Woodstock

2008-03-11T15:20:00.000-07:00

Wow! The last two newsletters set off an avalanche of emails – a few were negative, but most were positive, and many were charged with emotion. Here are your responses to my last two letters....

CLICK HERE TO READ THIS WEEK'S NEWSLETTER

McCain's Economic Plan Raises Questions

2008-03-04T14:25:00.000-08:00

What is John McCain's economic plan? Who will be his advisors, and what do they believe? And what does it all mean for the U.S. Dollar? For the answers to these questions and more, check out THIS WEEK'S NEWSLETTER

Ed Ponsi on CNBC

2008-02-28T22:15:00.000-08:00

Oil at $120? Gold at $1000 AUD/USD at parity? Why buy Altria and Coca Cola? How far will the Fed cut rates? Click the links below to view Ed's informative CNBC appearance.

ED PONSI ON CNBC PART ONE

ED PONSI ON CNBC PART TWO

Fixing Obama's Economic Plan

2008-02-26T11:05:00.000-08:00

No question about it, Barack Obama is on a roll. Here's a look at Obama's plan for jobs - the good, the bad, and a way to meet in the middle. CLICK HERE TO READ

What's Working Now

2008-02-26T10:52:00.000-08:00

Why is trading just like driving? Why have some correlations disappeared, and new ones appeared? Read about these topics and more in THIS WEEK'S NEWSLETTER

Brother, Can You Spare A Euro?

2008-02-12T15:27:00.000-08:00

This week, we'll discuss Euro-based CD's, how to calculate rollover interest, why the Taj Mahal no longer accepts US Dollars, stocks that benefit from a weak dollar, and more - all in THIS WEEK'S NEWSLETTER!!!

Sorry, Wrong Number

2008-02-06T07:04:00.000-08:00

Why Is the Non Farm Payroll number so unreliable? Which central bank is actually raising interest rates, and how can you profit from it? What is a "quant" and why does it matter? For all this and more, please check out THIS WEEK'S NEWSLETTER

Got Questions?

2008-01-28T16:13:00.000-08:00

Greetings from Mexico! I'm getting a lot of great questions from readers, so we're going to continue with Forex Q&A. This week, we'll talk about protective stops, inter-market relationships and how to defend against loss. CLICK HERE TO READ THIS WEEK'S NEWSLETTER

More Forex Q&A With Ed Ponsi

2008-01-22T03:44:00.000-08:00

The title says it all - CLICK HERE to read this week's newsletter!

Massive Head and Shoulder Breakdown

2008-01-08T08:53:00.000-08:00

In THIS WEEK'S NEWSLETTER we look at the breakdown in GBPJPY, and answer some of your questions. Happy reading!

Forex Q&A With Ed Ponsi

2008-01-04T13:38:00.000-08:00

This week, an interesting analysis of EURCAD, an explanation of Average True Range, some words about market manipulation, and more...we hope you enjoy this week's newsletter, titled FOREX Q&A WITH ED PONSI

A New Beginning

2007-12-30T14:05:00.000-08:00

This week, we look at low volatility trading, the continuing weakness in the British Pound, and how rumors can affect the Forex market. All of this and more in this week's newsletter, titled A NEW BEGINNING

Ed Ponsi on CNN

2007-12-25T04:37:00.000-08:00

CNN's Charles Hodson asks Currency Trader Ed Ponsi what the future has for the U.S. dollar. CLICK HERE TO VIEW

Deja Vu

2007-12-18T13:42:00.000-08:00

Hello from London! Lots of good stuff this week, including problems for the Pound, why the Dollar rally won't last, the real reasoning behind the Fed's recent actions, and more. Click here to read this week's article.

Here's a shot from CNN...Cheers!

Cherrio!

2007-12-12T07:24:00.000-08:00

I'm on my way to London. Please keep an eye out for the following TV appearances while I'm in the UK. Here are my appearances for Friday, Dec 14....

CNBC Europe 4:10 PM (London and GMT time)
CNN International between 7-8 PM (London and GMT time)

It's Rate Cutting Time

2007-12-12T07:09:00.000-08:00

Was the Fed right or wrong on the Dec 11 interest rate decision? Where are the Canadian Dollar and the British Pound headed next? How can you join the 'Millionaire's Club'? With the rise of Sovereign Wealth Funds, what will our future look like? For these answers and more, CLICK HERE TO READ THIS WEEKS NEWSLETTER

2008 Trade of the Year

2007-12-05T13:48:00.000-08:00

Goldman Sachs just released it's list of best trades for 2008 - which currencies do they like, and why? Speaking of Goldman, why is Ben Stein upset with the investment banker? Hugo Chavez lost, oil and gold are falling, and the USD is rallying - is this the start of something big? How do you short real estate? For the answers to these and other questions, CLICK HERE TO READ THIS WEEK'S NEWSLETTER

Forex and Existentialism

2007-11-28T13:59:00.000-08:00

This week - Will Airbus go under because of the weak USD? Does Jean Claude Trichet have a trick up his sleeve? The British Pound softens up; are rate cuts coming from the BoE? USDJPY breaks support, and more, in this week's article, "Forex and Existentialism"

The Legion of Doom

2007-11-21T03:18:00.000-08:00

In this week's letter - a buffoon and a tyrant slam the USD, The USDJPY hanging by a thread, meditations on the media, and of course - because you asked for it - more Chuck Norris. Click here to read

Live with Maria Bartaromo

2007-11-14T14:18:00.000-08:00

Here is the link to my interview with Maria Bartaromo from Monday.