Ed Ponsi on CNN Today....

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

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

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

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

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

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

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.