Elliott Wave International presents Part II of the interview with Jim Martens. (Read Part I here.)
Who is Jim Martens?Jim started with the Elliott Wave Principle in 1985 and first put that knowledge to use as a technical analyst at the COMEX Exchange in New York. Jim came to 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.
Starting January 12, learn from Jim live at EWI's online forex trading course, "How to Use the Wave Principle to Maximize Your Forex Trading." Click for details.
Vadim Pokhlebkin: I've seen online ads that say, "Trading forex is easy." Do you think it's easy?
Jim Martens: Well, I’d go back to the first question you asked me. (Ed. -- See Part I of this interview.) Easy? No. Easi-er than equities? Yes.
In forex, there are fewer markets, so fewer choices and less news to be concerned with -- so, fewer surprises. Our main goal is to find the one currency that looks the strongest against others and one that looks the weakest. Found them -- now pair them together. Sounds easy, but in practice, keep in mind that when trading ANY vehicle, we are trying to predict the future, and that’s a hard task. It's especially hard with individual equities, because you need a real system of how to approach first the broad market, then the sectors, then your stocks. That’s why Wall Street investment houses have hundreds of equity analysis -- and maybe five technicians, the analysis who, like us at Elliott Wave International, focus on the markets’ technical picture. That’s also why a lot more forex traders use technicals than equity traders. But winning is hard in both markets.
We can only control one thing when it comes to the future: How many viable possibilities there are. Elliott wave analysis allows us to limit those down to a handful, and rank them in terms of their probability. That's a great advantage, but at the end of the day, trading is trading, so the requirements are the same: 1) Know your risks; 2) Know where you are wrong before you get in the trade; 3) Know your risk appetite and don't risk beyond what you can stomach; 4) Stick to your convictions; and 5) Manage money for YOUR own needs.
VP: You forecast currencies using Elliott wave analysis. Why Elliott? Why not just watch the news and trade forex around the major economic report releases.
JM: Yes, you should pay attention to the news! But relying solely on the news will get you into trouble. For example, let's say the Federal Reserve raises interest rate. Will the dollar soar or fall? Using fundamental analysis, you can argue for both scenarios: 1) Higher rates are bullish for the dollar because it means the Fed thinks the U.S. economy is getting stronger, or 2) Higher interest rates are bearish for the dollar because they make borrowing more expensive, and that slows the economy. See? Same news, opposite interpretations, each one perfectly logical. But with Elliott, you know what the larger Elliott wave pattern is, so regardless of the news-driven volatility, you can remain objective about the larger trend and not confuse yourself with the "fundamentals."
In my work, I follow the news -- I just use it differently. As technicians, we already know based on chart patterns what the market should do. We look at its reaction to the news and see how it fits into the wave pattern. Many traders shy away from taking risks around big news events, and I don't blame them, because volatility can be tremendous. But we’ve had some good success over the years at forecasting the markets before a big news report. If wave patterns show a clear setup in front of the news, we’ve often been able to use the subsequent volatility to our advantage.
Now, why do I use the Wave Principle, in general? It just fits my personality.
VP: How did you learn Elliott? How long was it before you were able to make confident forecasts? Where should one start with applying Elliott wave analysis to forex?
JM: About 25 years ago, in mid-eighties, I first saw Robert Prechter, EWI's president, on TV. He had quite a following and was on almost every week. I watched his forecasts come true, for the most part; that certainly gets your attention. As many people did, I order his book, “Elliott Wave Principle -- Key to Market Behavior,” read it, and that was it. The first two chapters tell you everything you need to know. It’s not an easy read; you do have to stop and think. (Lots of pictures, though!) There is really not a wasted word in those 70-some pages. It took me several readings, and even now I go back and re-read them every once in a while.
Elliott wave analysis is very much like a jig-saw puzzle. There is a handful of parts, and those pieces fit together; each pattern sends a message. I started, like most people, by applying Elliott to equities, but after joining EWI in 1993, I’ve applied it to virtually every market we cover (about sixty of them, give or take), in all time frames. So I’ve seen it in every situation.
How long did it take to learn it? Well, I never stopped! Just the other day, I again watched one of Prechter’s old videos on applying Elliott wave in practice. And I take the same approach with my subscribers. (Ed. -- Jim Martens is the editor of EWI's intensive Currency Specialty Service.) Every Friday, I record a 5-6 minute video where I not only explain our forecasts but also include an educational component, often about the basics. Learning the basics well will help you a lot. So, if you're a forex trader interested in Elliott, you start with Bob’s book, you watch my videos, and you label your own charts.
Over the years, I’ve seen that the most successful folks are not those who blindly follow my forex forecasts -- it's those who do their homework, who do their own analysis, Elliott wave or something else. They think for themselves, and when they put on a trade, it's because they have their own conclusions. Once they’ve done that, then they look to see what my Currency Specialty Service is suggesting. If we agree on the trend, they have greater confidence. If we disagree, then the real work begins. Why do we disagree? What price levels need to break to make their wave interpretations work and mine fail, and vice versa?
That brings up another important point. Some say it’s confusing that you may sometimes have a couple of different Elliott wave interpretations of the same price move. But the real question is, do they point in the same direction? If so, that’s not confusing, that's comforting; it’s a confirmation. So those subscribers who do their own Elliott, as long as their wave counts and mine give at least a minimum common price target and limit the risk, they can go ahead and act anyway. We’ll decide later which wave count is right. Many people forget that; it’s a classic case of missing the forest for the trees. They lose sight of the trend over arguing about wave interpretations. Sometimes, it doesn’t really matter! The market will eventually decide who is right or wrong -- but if the trend is clear, go with it. That’s how I use the Wave Principle.