Online Trading Academy, Equities, E-mini Futures, Options, Technical Analysis Strategies, Platform Immersion, and Personal Trading Plan Instructor

Greetings from New York! We have a couple of great questions for you this week, so lets 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 youre 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 worlds 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, youre 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 worlds 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 worlds reserve currency are the Chinese Yuan and the Euro. Chinas economy will become the worlds 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 Chinas 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.

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.