- Published on Saturday, 18 February 2012 12:23
- Written by News Editor
Ed Ponsi is the President of FXEducator.com. As an experienced professional trader and money manager, Ed has advised hedge funds, institutional traders and individual traders of all levels of skill and experience.
Ed has made numerous appearances on CNBC and the Fox Business Network and has also appeared on CNN and the BBC.
His dynamic and humorous style of teaching sets him apart from the ‘suit and tie crowd,’ making him one of the most sought after lecturers in the financial world. Ed is the author of Forex Patterns and Probabilities.
Part I: On Trading?
FJ: Ed, when and how did you get started in trading?
EP : I owned a business that allowed me to finish work 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 about trading and the markets.
FJ: What did you find trading interesting?
EP : The idea that people could make money based on the objective and rational analysis of facts intrigued me. Of course, along the way you find out that it is not that simple, you also have to become an amateur psychologist. But that is one of the reasons why trading is fun – it forces you to stretch your horizons.
FJ: What was it like when you first started trading?
EP : Like most U.S. based traders, I got started in the equity markets. This was in the mid-1990s, so I was fortunate to get started at the beginning of a huge bull market. I traded mostly NASDAQ stocks, trying to capture quarter-point spreads. This was prior to the introduction of decimal spreads.
FJ: Did you receive any assistance when you started trading? Where did you go for advice?
EP : I had no clue what I was doing, and in the early days I made money despite this fact. Luckily, the market was very forgiving at that time, and would bail a trader out, as long as you were not short. Realizing that I needed to learn how to really trade, I decided to sell my business and get a job on Wall Street. That was when I really began to learn how to trade.
FJ: How much capital did you start with in trading?
EP : I started with about $100,000 in risk capital and my account equity gyrated wildly for the first few years. This was before I ever heard the words, “risk management.”
FJ: Speaking of the money aspect, do you think there is a minimum account size a trader should start with when they begin trading?
EP : Traders have it so much easier today, with the realistic simulators and mini accounts that are available now. I think $5000, placed in a mini account, is a good minimum starting figure for new currency traders. Before doing this, they should trade for at least a few months on a simulated account.
FJ: What instruments do you trade now?
EP : Mostly currencies, but I also find equities intriguing again. The rules have changed in the U.S., making it easier to short stocks regardless of the direction of the last tick. They are two separate animals, and I like them for different reasons. Forex is my bread and butter, and equity trading is more of an occasional dessert.
FJ: Why Forex?
EP : I was not exposed to currencies until I began working on Wall Street. My style of equity trading was based on trends, using a top-down analysis. Someone pointed out that as a trend-follower, currencies would be perfectly suited to my trading style. The Forex market featured fantastic long-term trends, behaved more rationally than equities, and offered plenty of volatility, which traders need to make money.
FJ: Speaking of volatility, which currency pairs are the most volatile?
EP : I try not to get too esoteric, and instead I focus on the major currencies. Out of those, I would have to say the most volatile pair that I am willing to trade is the “guppy” – GBP/JPY. In August, I saw a short-covering rally in that pair that made my head spin – 300 pips in one hour! Sometimes this pair is too volatile, and during those times, EUR/JPY is a nice substitute.
FJ: What timeframe do you use?
EP : It is funny, the longer I have been around, the longer my timeframes become. In the early days, everything was intra-day, using 15-minute, 5-minute, and even 1-minute charts. I was constantly staring at the screen, minding every tick. After a while, I realized that I was ‘fishing for minnows,’ and that the real money was in the big move. Now, I rarely look at anything lower than a 1-hour chart and this year, I started trading off of weekly charts for the first time.
FJ: How many charts do you view at a time?
EP : I usually look at no more than four charts at one time, and sometimes as few as two – same currency pair, different timeframes. Always start from the longest and work down to the shortest.
FJ: Did you develop your own trading system(s) or are you discretionary?
EP : I use some pretty well defined systems, but there is an element of discretion to everything I do. It would be impossible to accurately backtest my systems because of that element of discretion.
FJ: What about indicators? Are there any specific technical indicators you prefer?
EP : It is funny. I took a round trip from using simple systems to complex systems and back. There is a natural assumption that complex systems are superior, but that is not necessarily true. These days, I keep it pretty simple. Exponential moving averages, average true range, relative strength index, candlestick charts and Fibonacci are my most frequently used tools.
FJ: How do you measure momentum in the Forex market?
EP : I find candlestick charts very useful for this. For example, I look for long candles that close on their highs or lows. The ‘Marabozu’ candlestick formation, a long candle with no wicks, tells me that even though traders are in a profitable position, they are not willing to take profits yet. This usually means that the move still has some life left in it.
FJ: Can you give a step-by-step approach to how someone should set up a trading plan before they trade?
Step 1 – determine the direction of the trade based on the overall trend.
Step 2 – determine the best location for the entry and the stop.
Step 3 – calculate the exact amount of risk; if it is too great, discard the trade.
Step 4 – make certain that you are trading the best opportunity available; this requires more work, more charts to view, etc. but it forces the trader to be more selective, which is very important to long term success.
FJ: When people migrate from stocks into futures, or Forex, for that matter, the issue of leverage comes in. Is that something they have to be mindful of?
EP : Yes, but I think a lot of stock traders are confused by the leverage issue when they consider Forex. They use leverage of 2 to 1 or 4 to 1 and are terrified by the thought of using 100 to 1 leverage. They need to understand that comparing stocks to Forex is like comparing apples and oranges. A good trading stock might have a daily range of over $2 per day, while a currency pair like EUR/USD moves in a range of less than one penny per day. Imagine trying to trade a stock that moves less than a penny a day, and you will understand why Forex traders need to use a greater amount of leverage. It magnifies the position to the point where tiny moves become meaningful.
Also, stock traders come from a world where they must pay interest to use leverage. When I tell them that I often collect considerable sums of interest on borrowed money – the carry trade – they start to get woozy, and a funny look crosses their faces. I think some of them do not believe me when I tell them they can collect interest while using leverage of 100 to 1.
FJ: On average, how long do you hold a position?
EP : Usually, the longer I am in a trading position, the more profitable it has become because I am trying to capture a trending move, and I want to hold it until the trend fails. My shorter-term currency trades based on the hourly chart, usually last a few days. My longer ones tend to last for weeks. If I am very lucky, I might hold on to a trade for months.
FJ: You have been trading for some time. I think one of the most difficult things traders are faced with is dealing with emotion. How do you avoid falling into the type of trap?
EP : The sheer repetition of trading, of being in the markets for years, causes the emotions to fade. You still feel them, but not as deeply and it becomes much easier to sense when you are being affected by emotions. You catch yourself and you think, “I am beginning to get angry, time to turn off the computer and take a walk” or “Wow, I am really getting too happy right now – better chill out for a bit.” Too much positive emotion can be dangerous too, because traders begin to believe they are bulletproof and this leads to increased risk.
FJ: Do you still make the same mistakes that you made in the past after you have been trading so long?
EP : No, because if I did, we would not be having this conversation right now. Sometimes, you have to make the mistake and feel the pain in order to learn the lesson. For instance, in my early days, I held onto and averaged into losing trades – classic bad trading behavior. I got away with it for a while, but the reality that what you are doing is incorrect never really hits home until you feel some pain. That is when you decide, “I will never make that mistake again.”
FJ: How do you handle losing periods and slumps?
EP : When you are new to trading, a losing streak becomes really bothersome because we begin to doubt ourselves. We begin to question whether or not we have a future in this business. Over time, I began to realize that losing is just a part of winning, a necessary part. To use a military analogy, you cannot win the war unless you are willing to lose some battles along the way. It is necessary to suffer short-term losses in order to achieve long-term success. Once I realized this, losing did not bother me as much.
FJ: What about times when a winner become a loser?
EP : Nobody likes having a winning trade turn into a loser, but why? Is it really any worse than a trade that was a loser from the start? The only difference is how we are affected emotionally, which is irrelevant – the market does not care how we ‘feel.’ So, while I do not enjoy having a winner turn into a loser, it does not spoil my day either. It is just a part of the process.
FJ: What about placing stops?
EP : Stops are absolutely necessary. If you are not using a protective stop, you are risking the entire account. Everyone complains about stop hunts, but this is something that vexes short-term traders. When I gravitated to longer timeframes, I found that this was less of a problem, since my stops and targets are wider now.
FJ: Are there any specific money management strategies that traders should employ?
EP : I think one of the best money management strategies is to choose a percentage of the account that you are willing to risk on a given trade, and never exceed that level of risk. Adhering to this rule will make it impossible to blow up the account with a huge loss, which is how most traders meet their end.
FJ: Are there any specific strategies that work better in the currency markets than in others?
EP : Fibonacci definitely works better in the currency markets than it does elsewhere. It is a huge part of the Forex trading culture. I really believe that it only works because currency traders use it. It is self-fulfilling. Working on a Wall Street equity-trading desk, I distinctly remember hearing laughter whenever Fibonacci was mentioned. This was a clear indication to me that ‘Fibs’ are not a part of the stock trading culture, so there is little chance for their self-fulfilling nature to shine through in that market.
FJ: How do you define success in trading?
EP : Well, if you are making money, you are ahead of the majority of traders, but anyone can make money in the short run. I would define success in trading as consistency. A trader who can make just 2% to 3% per month, every month, without taking inordinate risk or suffering a severe drawdown is a successful trader. He or she is outperforming most traders, hedge funds, mutual funds and indexes. A trader who can make more than this on a consistent basis, year after year, is a rock star.
FJ: In terms of personal characteristics, do you think there is a certain type of individual who makes a better trader than others, or do you think everybody is capable if doing it?
EP : I really believe that there are certain personality traits that are essential to success. Have you ever met someone who simply can never admit it when they are wrong? That individual will have a difficult time in the trading arena. You have to be able to admit that you are wrong, or you are toast.
Now, can a person who suffers from this weakness correct that problem? I believe they can. I tend to believe that anything is possible if we put our minds to it. If someone can understand what a huge problem this can be, then he or she has a chance to defeat it.
FJ: Given a chance, what would you like to do differently in trading again?
EP : It would be easy to say ‘take away the losses,’ but going through difficulties as a trader makes us who we are today. Every good trader I know went through some tough times, and if you think about it, they probably would not be very good traders without having lived through that experience. It helped to forge them into good traders.
FJ: What do you foresee for the markets in the next 2 to 3 months in trading opportunities?
EP : I am waiting for the whole sub-prime house of cards to come crashing down. All of these financial companies are underestimating their losses because they are dealing in a shadowy world where nothing is marked to market. It is human nature to try to sweep things under the rug and I expect that the losses we have heard about are just the tip of the iceberg. If the equity markets cave in, I will be scooping up the Japanese Yen with both hands on the way down. When the equity markets find the bottom, it will be time to flip the script and short the JPY against the stronger currencies.
Part II: Forex Patterns and Probabilities and Seminars
FJ: What motivated you to write the book?
EP : When I started out in trading, I read every book on the subject that I could get my hands on. I was so incredibly disappointed in what I read because most of the books that purported to teach one how to trade contained a lot of general information. Have you ever tried to place a general trade? Every trade needs a specific entry point, a specific stop, specific exits and so on. I wanted to write one of the very few books that teach very specific trading methodologies.
FJ: Where did you get the inspiration and ideas for the book?
EP : Most of the techniques had their beginnings as equity trading strategies because that is how I got my start. As my trading evolved, the strategies evolved. When I switched to currencies, the strategies were adjusted to account for the differences between Forex and equities. That was the tricky part; you had to really understand the differences between those markets and how they trade to make the correct adjustments. There was definitely an element of trial and error along the way. The most important adjustment was the use of longer timeframes.
FJ: What is the central theme of the book?
EP : It is purely a strategy book for currency traders. I like to think of Forex Patterns and Probabilities as everything that is missing from all of the other trading books. It is the antithesis of most of what is out there.
FJ: What makes it stand apart from other Forex trading books?
EP : Well, the really popular Forex books are popular because they are being pushed hard by a market maker or other entity that is using the book as a marketing tool to open accounts. Those books contain some good information but they do not teach you how to trade. A trader wrote Forex Patterns and Probabilities for people who want to learn how to trade. I went through the same experiences that many new traders are going through and I learned the lessons that they need to learn. That is why I did not write about the GDP of Australia or Purchasing Power Parity. All of that stuff is interesting and some of it can even be useful, but it does not teach you how to enter or exit a trade.
FJ: How could a reader get the most out of the book?
EP : Take the strategies in the book and try to apply them in a demo account. Learn one strategy at a time and keep referring back to the chapter of the book that corresponds to that strategy. Use the strategy over and over again and after a while, your thought process becomes quicker and you begin to see the opportunity as it develops. Also, pay close attention to be sure that you are using the right strategy at the right time, as indicated in the book.
FJ: Have you incorporated any ideas from the book into your trading and analysis? Which aspects have you incorporated?
EP : The book came directly from my trading experiences, but traders have to continue to evolve. I have begun to use some of the techniques, for example FXEd Trend, on the weekly chart instead of just on the daily chart, which was the case when I wrote the book. As I said earlier, the longer I am in the business, the more long-term oriented I become.
FJ: How has it improved your trading and analysis?
EP : Using the longer timeframes was the best move I made regarding Forex. In the future, when spreads are tighter and maybe we have a real Level II-style platform for Forex, short-term traders will have a better chance. But right now, all of the winning traders that I know are using long-term analysis for currencies.
FJ: You conduct seminars, too. Why do you do that?
EP : It is fun and it keeps me fresh. Once in a while, a student will ask a question that really makes me think and causes me to re-evaluate my processes. I never thought I would be a good teacher because I am not a patient person by nature. But it is rewarding on so many levels. Plus, I love to travel. This year I taught in London, Singapore and a few other cool places.
FJ: What do you teach at the seminars?
EP : It depends on the students. I try to feel out the level of experience and sophistication of the students and tailor the presentation to match. It is challenging but it is a blast.
Part III: Recommendations
FJ: What books would you recommend to our readers?
EP : I think the ‘Market Wizards’ series by Jack Schwager should be required reading for anyone who wants to trade for a living. That series of books really allows you to get inside the mindset of a successful trader. Rob Booker wrote a great book called Adventures of a Currency Trader. I also really enjoyed Jim Cramer’s Confessions of a Street Addict and the classic, Reminiscences of a Stock Operator by Edwin Lefevre.
FJ: What advice would you give to someone who is thinking about trading for a living?
EP : Trading is a great equalizer. You do not have to hold a PhD or an MBA to trade for a living. There are traders who are consistently successful, year after year. Nobody can stop you if you put your mind to it.
FJ: Do you have any final comments you would like to share?
EP : Just one thing – traders need to play good defense. Everyone wants to be a good swordsman, but your shield is what keeps you in the battle. If you can stay in the battle long enough, you can learn to win.