Reader Forex Questions and Answers

Posted January 13th, 2011 by Sam Evans in Education

Reader Forex Questions and Answers

I typically use the holiday to catch up on the many emails I receive from students and non-grads of Online Trading Academy worldwide, so I thought I would use this particular opportunity to answer some of those messages publicly, in an effort to share a little advice across the board:

Hi Sam, I read your articles each week and would like to say thanks for your little nuggets of advice ñ they have helped a lot! I wanted to ask your opinion on Technical Indicators as I am having trouble with choosing which ones to use as there are just so many...what would you suggest to be the best out there? Many thanks, Sara J, Detroit USA

Hello Sara, and thanks for your question. When teaching in the classroom environment of Online Trading Academy, I often get asked this very same question and it is completely valid. I am not a huge fan of using Technical Indicators and to be honest, they probably cost me more money than made me in the early part of my career. However, back then I was using them to generate buy and sell signals alone and pretty much ignoring price itself. Now at this stage of my trading career, I always pay the most amount of attention to price and price alone. All other Technical Indicators are really nothing more than derivatives of price, and without price data, they cannot function, so why not pay more attention to price? With that said, a technical indicator can be of great help only if used in the correct manner, such as for aiding the decision making process and filtering trades so we have less choice of trades. I would say that Bollinger Bands are a great way for newer traders to begin to understand the volatility of price and a simple oscillator like the RSI will help you to filter extreme price points. Just remember to always keep an eye on trend and price action first.

Sam, I was looking back on an article you wrote some weeks ago about the AUDUSD reaching parity point with the US Dollar. You advised in the article that you were not an interested buyer at the time, but it still went higher before dropping lower again. I have been finding it tough to trade with many mixed signals. How are you dealing with the AUDUSD yourself? Thanks for your attention, John D, Miami USA

Hi John, you make a great point here. I clearly remember the AUDUSD article. It was entitled, "Aussie Heaven Or Hell?," from October. At the time of writing, the AUDUSD had just reached and broken parity point for the first time this year and it was all across the news. I stated that to me, this would be the worst time for buying the currency pair as so many had already bought it and it was at such a high price. It would be like me going out today to fill my car with petrol and looking to buy it from the most expensive garage I could find! Trading Forex is really not any different. After such a dominant rise of the pair, it becomes harder and harder for us to make a profit as the margin is continually shrinking. Let's take a look at it now:

Figure 1

As we can see, every time the Aussie attempts to breach the $1.00 apiece level, it is met with firm resistance once again, making it very difficult to generate a profit for the high buyer. What we really need to see here is a convincing push by the pair higher or lower, so we can see either true strength of weakness in the market. Until then, I will be sitting on my hands and looking for something else to trade as I agree it has been tough to trade as of late, mainly due to the uncertainty in this market. If the market itself is uncertain of where it wants to be, then best stay away to be safe!

Hello Sam, I probably do 90% of my Forex trading on the EURUSD and have been finding it a little challenging over the last few weeks especially, with not so many great opportunities available. I would like to trade other pairs but there are so many to choose from and the spreads can be huge! What would you suggest to start looking at as an alternative to the EURUSD? Regards, Gary T, Chicago, USA

Thanks for your email Gary. As most of us know, the EURUSD is probably by far the most popular trading instrument for currency speculators across the board, followed by the likes of GBPUSD and USDJPY. However, just because it is the most popular doesn't mean that it is always the best thing to be risking your capital on. I would say that the majority of my own trades take place on the US Dollar Majors, but I am always keen to branch out a little and see what else there is on offer. One of the reasons the majors are more popular among Forex traders is that they tend to have the tightest spreads on offer, between 2-5 pips. With some of the other cross pairs like GBPJPY, AUDCHF and GBPCAD, you can often find spreads much higher in the region of 6-9 pips, or sometimes as high as 12 pips. My advice is to simply not use these pairs for any kind of day trading, as the cost of the spread makes doing business very expensive. Instead, we can focus on the pairs for swing and positions trades instead. I certainly don't mind paying a larger spread when there is a terrific potential profit margin available to me. Go out there and treat any of these cross pairs the same way as you would the majors, but just look out for trading opportunities on larger time frames instead.

Hey Sam, after reading one of your lessons detailing the Forex Futures market, I have started practicing on a demo account with mixed results, but I am still eager to get trading live. When do you think will be the right time for me to start properly? Thanks in advance, Jason B, Dublin IRE

Hey Jason, I am glad you have discovered the Forex Futures market. You will find it to be a great arena for day trading with its true market volume and slick execution tools. It is always wise to start on a demo account when learning about a new market of any kind, especially with the ferocity of the futures! However, one disadvantage of demo trading for too long is that it can lead us into a false sense of security. You see, it is far easier to pull the trigger on a demo account, even if you are sticking to a detailed trading plan because there is absolutely no fear of financial loss if the trade does not work in our favor. Sometimes adjusting over to a live account can be a hard transition, as the fear then grips the trader and stops them from pulling the trigger when they should, and with futures markets, there really is no time to hang around. My advice to you is to only put money into a live futures account which you can afford to lose and only when you are seeing regular profits from your other trading accounts. This will take the pressure off of you and you will know that you are ready to trade futures because you will already be making money from your other trading activities. Good luck my friend!

Hi Sam, Thanks for your ongoing articles each week as I find them to be a refreshing insight into the world of trading. While I do like your simplistic approach to analysis, I have also noticed that you rarely mention Fibonacci studies in your articles. Do you not like them or find them useful in your trading? Your thoughts would be appreciated! Best, Jenna M, New York, USA

Hi Jenna and thanks for the email. I can publicly state right now that I have absolutely nothing against Fibonacci studies and never will! In fact, I think that if used and applied to larger time frames and for longer term swing and position trades, Fibs can be especially useful in giving traders an idea of their entry zones and the profit targets for the trades, too. Unlike other indicators, Fibs are static in nature and don't tend to overload the trader with too many signals, unlike a Stochastic oscillator. As we can see from the below example of the recent price action from the EURUSD, a Fibonacci Retracement study gave a great idea for a short entry:

Figure 2

However, like any other indicator, I would never suggest taking a trade from a Fib level alone, though. As you can see from this above example, the Fib level also lines up with a significant price area of 1.3500, which has been both price support and resistance. Always make sure there are multiple reasons to take a trade in any instance and you will find the object analysis and decision making process far easier on your emotions. I hope this helped.

Sam Evans

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