Lessons from the Pros

News, Analysis, and the Real Work of Trading

Q) Hi my name is Lewis and I have only been trading Forex for a short time. I saw previously trading at different times of day has been mentioned. I’ve been told to stay away from 8-9 am U.K. time due to the fact the news can mess you up. I feel this is the best time to trade; as the breakout starts, jump on the train my friend! Also, could you please tell me why there is less volume around December time?

Ed Ponsi) Thank you for your email. Different traders have different methodologies, and while not everyone shares the same approach, this does not invalidate the opinions of others whose approach varies from our own. Some traders seek to avoid the volatility associated with news releases, while others live for it. There are traders who simply place short-term trades based on news only, and schedule their entire day around various economic new releases. In order to trade this way, they use trading platforms that feature fixed spreads, because brokers who offer variable spreads on their platforms tend to widen the spreads just prior to news releases.

My personal belief is that while certain events warrant your avoidance, you can’t dodge every economic report – nor should you. I avoid trading during Non Farm Payroll report, which is released on the first Friday of every month at 8:30 a.m. Eastern time, because it creates a tremendous amount of volatility, and because many, many traders damage their accounts during this event. I also stay out of the market during FOMC meetings – at least at the time when the decisions are announced, at 2:15 p.m. Eastern time (this usually happens on a Tuesday, but occasionally this occurs on a Wednesday).

The reason why volume drops at the end of the year is simple; many major religions have significant holidays at this time of year, and the head traders of many trading desks are on vacation. While they are away, they leave their subordinates in charge of the desk – usually with instructions to keep things under control and to avoid taking any dramatic or risky trades. Also, institutional traders are concerned because due to the lower volume, there is greater risk that a large trade may inadvertently move the market. This is not a concern during most of the year, when the volume and liquidity are much higher, but it’s easier for a trader to damage an account at this time of the year, so all precautions are taken to assure that risk is kept to a minimum. This means keeping activity to a minimum, and therefore volume is low.

Q) Hi Ed, your advice and analysis in 2008 has been a great help in learning to trade Forex consistently, but it’s still hard work. I am slowly mastering the technicals and key fundamentals. My question is, with so many informational websites and financial TV networks, how does one create a consistent and manageable go-to list of data sources to review the day’s happenings and sense of the longer-term direction of the financial markets. I appreciate your comments.

Ed Ponsi) Thank you for your question. You’re right, it would be impossible to read every article or visit every financial website out there, and you have to find your favorites. For example, I like to read the Financial Times, which you can think of as a sort of "Wall Street Journal" for global traders. I’ve found that publications based outside of the U.S. tend to pay more attention to currencies, since Forex is already the preferred trading vehicle in most of the world outside of the U.S. (where it is rapidly gaining popularity). Of course there is no better source for news in my opinion than a real-time newswire. You can learn a lot about the markets by simply observing how currency exchange rates react to news, speeches, and economic data. This exercise teaches us which events the markets consider significant, and which events are unimportant.

Q) Hi Ed, I am very new to the world of Forex. I read a couple of articles you wrote and I found the articles to be quite informative. I think the one thing you stated in one of the articles that really stood out to me was, "Signal services and trading systems may seem like nice shortcuts to the novice trader, but only serve to delay the real work that needs to be done." I guess what I would like to ask is, what is this "real work" you were referring to? I think this is the one thing that is giving me the most trouble. Where do I start on my information gathering journey?

Ed Ponsi) Thank you for your questions. The "real work" of trading is learning how to create a system and then execute it consistently. If we depend on others to make our decisions for us, we’ll never achieve the level we need to reach to succeed in this business. Instead, we have to learn how to do our own analysis and listen to ourselves, and not be swayed or influenced by others.

I base all of my trading systems on what I would call "market tendencies". For example, the Forex market has a tendency to create long, persistent trends, so I’ve created several systems that are designed to get me in, and more important, keep me in trades that are based on a dominant trend. If that sounds complicated, I want you to know that it really isn’t – in fact, most traders create systems that are way too complex. Just remember that we are not paid based on how tricky or clever our systems are, but we are paid based on how effective our systems are at exploiting a market tendency. Good luck!

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