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Why Consider This $4-Trillion-a-Day Market? Part II
Elliott Wave International's forex expert discusses the pros and cons of speculating in currencies vs. stocks
By Vadim Pokhlebkin
Mon, 23 Apr 2012 14:30:00 ET
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Elliott Wave International presents Part II of the interview with Jim Martens. (Read Part I here.) 

Jim MartensWho is Jim Martens?
Jim is one of the very few forex Elliott wave instructors in the world, and a long-time editor of EWI's forex-focused Currency Specialty Service. A sought-after speaker, Jim has been successfully applying Elliott since the mid-1980s, including 2 years at the George Soros-affiliated hedge fund, Nexus Capital, Ltd. 
 
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 you have 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 analysts -- and maybe five technicians, the analysts 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.
 
As a technical trader, you can only control one thing when it comes to the future: How many viable chart pattern 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: What percentage of your capital are you betting with? What's your "pain threshold" (i.e., stop-loss)? What's your profit goal?
  2. Know at what price you are wrong before you get in the trade. (Elliott wave analysis is great at helping you determine that.)
  3. Know your risk appetite and don't risk beyond what you can stomach. If you're only comfortable trading at, say, 5 times the leverage while risking 2% of your capital per trade, then don't push yourself beyond that limit. (It's different for everyone.)
  4. Stick to your convictions. If your analysis strongly suggests the market will move in one particular direction, trust your analysis, not the "noise": the news, analysts' opinions, etc.
  5. Manage money for YOUR own needs. This ties in with point #1: What are your goals? Are they realistic? How do you get there? Break it down to the smallest parts.
VP: In your Currency Specialty Service, you and your teammates forecast forex 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 rates. Will the dollar soar or fall? Using fundamental analysis, you can argue for both scenarios:
 
Scenario 1: Higher interest rates are bullish for the U.S. dollar because it means the Fed thinks the U.S. economy is getting stronger.
 
OR
 
Scenario 2: Higher interest rates are bearish for the U.S. dollar because they make borrowing more expensive, and that slows the economy.
 
See? Same news, opposite interpretations -- yet each one perfectly logical!
 
With Elliott wave analysis, you don't have that. You know what the larger Elliott wave pattern is, so regardless of the news-driven volatility, you know the larger trend. Which means that can remain objective and not confuse yourself with the hour-by-hour news and the "fundamentals."
 
In my work, I do follow the news -- I just use it differently. As technicians, we already know based on chart patterns where the market should go. We look at its reaction to the news and see how it fits into the Elliott 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 -- because we already know the larger trend! If wave patterns show a clear bullish or bearish setup in front of the news, we’ve often been able to use the subsequent volatility to our advantage.
 
Besides that, why do I use Elliott wave analysis, 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 30 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 ordered his book, “Elliott Wave Principle -- Key to Market Behavior,” read it, and that was it. (Ed.: You get a free copy of the book when you subscribe to Currency Specialty Service.)
 
The first 2 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.
 
I started, like most people, by applying Elliott wave analysis to equities, but after joining EWI in 1993, I’ve applied it to virtually every market we cover (about 60 of them, give or take), in all time frames. So I’ve seen it work 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. Every Friday, I record a 5-6 minute video for my Currency Specialty Service, where I explain our forecasts and 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 then you progress to label your own charts.
 
Over the years, I’ve seen that the most successful forex traders are not those who blindly follow my forecasts. It's those traders 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, it’s a confirmation! Those subscribers who do their own Elliott, as long as their wave counts and mine give at least a common price target and stop-loss level, they can go ahead and act anyway. The market will eventually decide which Elliott wave count is right -- but if the trend is clear, go with it. That’s how I use Elliott wave analysis. 

VP: Thank you for your engaging answers, Jim.

 
Not any more.
 
We've now "unpackaged" the Service and made it available to -- and affordable for -- all forex traders, big and small.
 
You get 24-hour-a-day analysis and actionable forecasts for 12 most-traded forex pairs.
 

 

 

 

Tags: currency, Elliott wave, Elliott Wave Education, Elliott Wave trading, euro, euro/USD exchange rate, eurozone, forex, forex trading, online trading, Robert Prechter, risk appetite, risk management, Swiss franc, U.S. dollar, U.S. Federal Reserve (the Fed), usd/jpy, volatility
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