Lessons from the Pros

Beat Down on the Pound

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 (see figure 1).

Figure 1: GBP/USD breaks support on the daily chart and falls to 1.40. Source: Saxo Bank

A look at the big picture (monthly chart) shows why 1.40 was such a key area, acting as support in the early part of the decade. Back then, resistance formed near the psychologically significant level of 1.50, which could come into play again (see figure 2).

Figure 2: GBP/USD monthly chart plunges to old support near 1.40 Source: Saxo Bank

Why is the Pound hitting a 7 ½ year low against the U.S. Dollar? The pound is sinking because of a new bank rescue plan announced last week. The bailout is aimed at protecting banks against further losses and guaranteeing bank assets backed by mortgages and other loans, but it also raises fears of diluting the money supply. The Pound temporarily reversed its plunge on rumors that the G7 would address the GBP’s weakness at its next meeting.

Also mentioned in that article was my long-term bearish outlook on GBP/JPY, accompanied by a chart of the pair preparing to break the 1.40 level. This week, the currency pair fell all the way to 1.20 and below after breaking support at 1.30. It is currently trading a full 2000 pips below the level shown in the chart in the November article (see figure 3).

Figure 3: GBP/JPY downtrend continues as the pair breaks to new lows. Source: Saxo Bank

The lesson here is that trends tend to continue for long periods of time, especially in the Forex market. This is one of the huge advantages of trading Forex. You see, we are trading entire economies here, not companies. A company that is in trouble can be turned around fairly quickly, but an economy that is weak tends to stay weak for a long time. So a currency that is in trouble like the British Pound can stay that way for a long time, as it certainly has already. Yet plenty of traders feel the need to buy something that has fallen off of a cliff, believing that "it can’t go any lower." Well, a currency that has been crushed can always go lower, and one that has been strong can always go higher for that matter. And in the world of currency trading, it often does just that. Once again, the trend is your friend!

Intervention on the Horizon?

Last week, we heard comments from Japan’s Ministry of Finance (MoF) hinting that the Bank of Japan may intentionally weaken the Yen. Japanese Vice Finance Minister Kazuyuki Sugimoto said last Thursday that excessive movement in the currency market is undesirable. While that comment may seem innocent enough, seasoned market watchers know that when the MoF speaks, it is to be taken seriously. A series of similar comments preceded the Bank of Japan’s big intervention in early 2004, when the BoJ single-handedly pushed the USD/JPY pair up by 700 pips in three weeks, so watch out.

Questions of the Week

Q) Hi Ed, great article on the Russian Ruble last week, but I have to take issue with one of your statements. You said "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?" Isn’t the problem with gas delivery to the Ukraine and Europe coming from a private company and not from the government itself? Thank you for clearing this up and please keep up the good work.

Ed Ponsi) Thank you for your question and for your kind comments. The company in question is called OAO Gazprom, but there is more going on here than meets the eye. Gazprom is the largest company in Russia, and they provide virtually all of the natural gas consumed by Bosnia and Herzegovina, Estonia, Finland, Republic of Macedonia, Latvia, Lithuania, Moldova and Slovakia, in addition to being a big supplier to Germany, France, and Italy – the three biggest economies in the European Monetary Union.

The Russian government did purchase a controlling stake in the company in 2005 (at what some believe was a price well below fair market value), but the line between Gazprom as a private company and a government entity has always been somewhat blurred. The current President of Russia, Dmitri A. Medvedev, is the former Chairman of Board of the company. Gazprom has also acted as an arm of the government in the area of the suppression of free speech, going so far as to buy out independent TV stations and newspapers that criticize the current regime and changing their editorial policies. The company varies the price of gas among different customers, to reward Russia’s allies and punish countries like the Ukraine, which is becoming too Western in its political ways for Russia’s taste.

Q) Hello Ed Ponsi, I read your last article where you mentioned traders with long ring fingers and those with short ring fingers. Please, what do the fingers have to do with success in trading? Where can I get to read about this comprehensively? Thanks.

Ed Ponsi) Thank you for your question. The report is contained in something called the Proceedings of the National Academy of Sciences (here is the abstract from the PNAS website), but I can see that I’ve opened a can of worms here and I hope we’re not taking this too seriously. Let’s not forget the possible effect of randomness or luck on this survey; it may be that several of the successful traders in the survey just happened to have long ring fingers, and this skewed the results. And no, undergoing elective surgery to make one finger longer than the other will not make you a better trader, so let’s not get too carried away.

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.

Ed Ponsi