What Investors Need to Know About Forex

11/14/2011 10:15 am EST

Focus: STRATEGIES

Casey Stubbs

Founder, Winners Edge Trading

These currency pairs are important to watch and consider when investing, says Casey Stubbs, who also explains his use of candlestick charts, and gives some getting-started tips for equity investors interested in forex trading.

Kate Stalter: Today I’m talking about forex with Casey Stubbs of Winners Edge Trading.

Casey, a forex trader wrote on the MoneyShow.com Web site that three of the big factors that can move currency markets are micro, macro—that is, economics data—and monetary policy. It seems that we’ve all of that in spades in the last few months. How would you advise monitoring the currency markets, given all the variables these days?

Casey Stubbs:  Well you’re absolutely right, and those factors are very much in play in the currency trading market, and that’s what requires currency traders to be very flexible…and they must be monitoring their positions constantly.

And one of the ways I recommend doing that is: Stay abreast of all of the news channels and stay tuned to the business section of the papers. Just keep a look out for articles that talk about the dollar, articles that talk about the Federal Reserve, and just try to gauge what is going on in those particular markets.

Kate Stalter: Let’s talk about some of the specifics that have been in the news. One thing that has been on the minds of people who trade and invest—across all asset classes, really—is the euro. Should forex traders be concerned about the fate of the euro right now, or really just watch what the charts are telling them?

Casey Stubbs: Well, I personally am a technical trader, which means I look at charts. Now I don’t disregard it completely, but one of the things you will notice in the news right now, and a lot of the different sources that you’ll hear information from is, reports will be varying back and forth. So one day you’ll hear that there’s good news coming out for the euro, and the next day you’ll hear that there’s bad news.

The market is actually in an indecision period, and has not been trending for some time. I’m speaking primarily about the euro/dollar (EUR/USD), which is the largest currency here that’s traded with much volume. It doesn’t have a dynamic trend, so it’s going back and forth, and you’re getting conflicting reports.

Really, I think in that type of environment, technical trading is ideally the best way to go, and that is looking and examining the patterns on the charts.

Kate Stalter: Rather than trying to, say, to forecast what might happen with the euro six months or a year from now, for example?

Casey Stubbs: I totally believe so, because especially with the current conditions of the United States economy and the dollar…that’s not really in great condition either.

So as far as making an educated decision based on economic data or financial information, it really doesn’t seem to be feasible that anyone would be able to do that at this point. It’s kind of just making an educated guess, which either way you would pick, it’s almost a toss-up.

Kate Stalter: Let me also ask you about the yen. That’s been in the news because it’s been rising pretty fast and the Bank of Japan intervened, as it’s prone to do. How should traders view the yen, Casey?

Casey Stubbs: Well, we recently had an intervention—last week, which had a tremendous impact on the yen. The dollar/yen (USD/JPY) rose quite a bit; it went from around 75 actually to 79, in a one-day period, because of the intervention.

Since that point it been very steady and has not moved, and I think going forward that we could expect very little movement until there’s a clear pattern or a clear direction on either economy.

The Bank of Japan is, of course, going to be watching it very carefully so if you see a drop, you might look for another intervention possibly, but unless we can see some strong economic signals I would expect that there would not be a whole lot of movement at this time.

Kate Stalter: Tell us about some other currency pairs that you’re watching at this moment.

Casey Stubbs: One of my favorite currency pairs to look at is the Australian/US dollar (AUD/USD). Over the past year or so, the Australian dollar has gained quite a bit vs. the dollar.

A lot of that has to do with the economic policies and the current economic condition in the United States, as well as the condition of the Australian economy. And Australia’s economy is tied into gold as well, so when you see gold going well you’ll notice that the Australian dollar oftentimes will correlate with that.

However, in the last couple of weeks we’ve seen the dollar gain some strength vs. the Australian dollar. It could be that we could be seeing a change in direction, especially if we see the United States economy pick up very soon.

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Kate Stalter: Anything else noteworthy that’s out there at this moment?

Casey Stubbs: Well, I tend to follow the dollar pairs vs. the majors. One of the other major pairs that I watch is every single day is the Great British Pound/US Dollar (GBP/USD). The British Pound/US dollar is a pair that moves very fast, because there’s a lot of volume on it, and there are days when you can see it move 200 to 300 different pips in a day.

Lots of volume on this pair, and just today, the price dropped quite a bit, the pound vs. the dollar dropped quite a bit, and that could signal a top on the current uptrend, and we could see a drop to possibly the 1.55 area.

Kate Stalter: Now you’re getting a little bit into the technicals, and that leads to my next question: What are some of the technical indicators that you use the most?

Casey Stubbs: Well, the technical indicator that I rely on the most is the candlestick. When you have a chart, they have candlesticks. There’s different types of charts, but the types that I use are candlestick charts.

A candlestick is a measurement of price for a certain period of time. All that means is: It talks about the price of what time it opens, and what time it closes, and the amount of price in that time. When you see a reversal, a strong price change, on a candlestick, many times will indicate a direction change. Trading and price moves in momentum; once momentum changes, then you can expect for that momentum to continue. So I look for candlestick changes to happen in abrupt patterns.

Kate Stalter: It makes sense how those would be much more useful to you, the way you have just explained, than something like high-low-close type of chart.

Casey Stubbs: This type of charting is actually called price action. The reason it is called price action is because the main indicator is price itself, which is found in the candlesticks. It is also the least lagging indicator. It will give you a signal as soon as it happen, rather when you look at certain other types of indicators, such as a moving average or stochastics, those are more lagging than using the candlesticks.

Kate Stalter: Casey, this interview is going to go on the investing channel, but a lot of people here who are equity investors are also interested in forex. You know at the very least, the currency markets are having more and more effect on the equity markets. So what’s your advice for stock investors who would like to begin forex trading?

Casey Stubbs: Well, my advice is that they would start out slowly, take an educational course and begin to find out what types of news events will move currency. Because different news events will move currency differently than stocks.

For example, one of the greatest impacting news events for forex is the non-farm payroll announcement which happens the first Friday of every month. That talks about the jobs that come out each month, and that impacts the currencies in a great way.

If you started to trade forex and you weren’t aware of that news report, you could find yourself into a little bit of trouble. You want to find out what news impacts the prices.

You will be using different brokers in forex accounts. You are going to want to do some research on brokers, and also, maybe open up a practice account, which we call a demo account, and use that before you actually trade with real money.

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