Elliott Wave International presents Part I of the interview with its senior currency strategist, Jim Martens.
Vadim Pokhlebkin: Jim, readers often tell us that they want to make money trading the markets. There are lots of options out there. Can you tell me why I'd want to look at forex and not, say, the more "traditional" stock trading?
Jim Martens: First of all, currency markets are much larger than equity markets. By most estimates, the daily volume in forex is as much as 10 times larger than the combined volume of ALL of the world’s stock markets. That makes it very liquid. We’re also talking about a market that trades 24 hours a day. That means that if you are a short-term trader and the price spikes after hours, you can adjust your existing position or enter a new one without having to wait until the market reopens the next morning. Sometimes you can do that with stocks too, but typically the spreads (the bid/ask) in stocks after hours widen out, so you may have to pay extra to buy a stock that, for example, announced great earnings after the close of the stock exchange at 4 PM.
That’s not the case with forex. Liquidity stays plenty deep for most investors around the clock. Yes, there are moments when currencies are less liquid, but for most participants, liquidity is fine even then. Spreads stay tight, too -- for example, for the euro-dollar exchange rate, or the EUR/USD, they are typically 2 pips (points) or less, and they may go to 3 pips when liquidity is not as high. But rarely do we ever see a major widening in spreads.
Who is Jim Martens?Jim started with the Elliott Wave Principle in 1985 and put that knowledge to use as a technical analyst at the COMEX Exchange in New York. Jim joined EWI in 1993, first as a commodity specialist and then as a currency analyst. In 2001, he joined Nexus Capital LTD., a George Soros-affiliated hedge fund, as its technical analyst. A few years later, Jim rejoined EWI as our senior currency strategist.
Secondly, I think the ease of choosing a currency to trade is a big advantage. How many stocks now trade around the world? Between the U.S., European and Asian stock markets, there are several dozen industries -- at least 40 of them, give or take, each with a number of sub-industries, and each one of those with 100+ stocks. So we’re talking about tens of thousands of stocks -- and you have to choose the right one! Even in bull markets, while the rising tide lifts all boats, as the saying goes, it may not lift your particular "boat" -- in fact, your stock may even decline if it’s not the best stock in its peer group, or if you’re in the wrong sector. Often, you see your sector or stock fall even as the general market rises, so you have to be very good -- or lucky -- at your stock picks.
The currency market has far fewer choices, and that makes my job much easier. Most forex traders stick to the major pairs; in fact, the bulk of trading is between the U.S. dollar and euro -- by some estimates, up to 70% of the total daily volume. Besides the EUR/USD, we have 5 or 6 other major pairs -- and by watching those, you are basically watching the entire world. Of course, we can expand into cross rates, but even then we’re still talking about a dozen, maybe two dozen markets versus tens of thousands of stocks. So currencies are just easier to follow in that regard.
Thirdly, when you trade individual stocks, news plays a much bigger role -- sector news, individual stock news like earnings, etc. With currencies, we focus on “the big story” instead. There are big economic data releases coming out of each country every week, but we watch economic data calendars and know when they are coming out -- and are rarely surprised by them.
Lastly, forex offers flexibility to go long and short with ease -- something that stocks just don't. When the broad stock market declines, most people are uncomfortable selling short -- that is, selling a stock they don’t own in hopes of buying it back later, returning it at a lower price and capturing the spread. Most investors just don’t do that, even with some new avenues for doing so that became open in recent years: mutual funds, ETFs, etc.
In forex, it’s a whole different story. Whenever we quote a currency market -- take the EUR/USD, again -- we are comparing one currency against the other; we are tracking the value of the euro against the value of the dollar. So even when we are selling one market, we are always buying another! We are always buying the base currency, which is the first one in name of the pair. In the EUR/USD, the base currency is the euro. On the other hand, in the dollar-Swiss franc (or the USD/CHF) we track the value of the dollar relative to franc; the dollar is the base.
Forex markets have lots of volatility, too -- good for aggressive traders. And if you’re a macro-trader, currencies are well-known for staying with the trend for a long time. Volatile at times, yes, but steadily trending. So, there are several reasons why one might look at forex versus stocks. ...
"How to Use the Wave Principle to Maximize Your Forex Trading" -- Learn from Jim Martens live at the 4-session online forex trading course that starts on January 12, 2011. Details.