Question

Hi Anna. Have been reading Forex for Beginners and I have a couple of questions if you have time. First, when considering the Relational Approach as discussed in your book, I see the problem with trading pairs which correlate, but if I was to buy EUR/USD and SELL USD/CHF then wouldn’t the potential profit/loss be doubled, assuming their current relationship continued throughout the trade? Second, I’ve been using MT5 to look back over the last months charts for the major pairs and it seems like hammers and shooting stars can be found fairly regularly at both the top and bottom of a trend. Does this seem right or am I reading these charts incorrectly? Loved your book and am really excited about getting involved in Forex, just want to make sure I fully understand the game before committing any real cash! Thanks for your time!

Answer

Hi – many thanks for your Facebook message and for your very kind comments about the Forex for Beginners book which are very much appreciated.

With regard to your question about the relationship between the EURUSD and USDCHF, yes you are correct that if you buy one and sell the other, you will be doubling either your profit or your loss. The reason for this is very simple. In the first case you are buying euros and selling dollars, and in the second you are selling dollars against the swiss francs. So you are taking a negative view of the US dollar but selling it against two different currencies.

One of the common mistakes novice traders make is to believe that in buying both pairs they have found the perfect hedge. In fact all they are actually doing is trading the EURCHF.

Broadening out your question to the relational aspect this is where one really begins to explore the complex relationships that exist between the four principle markets, of which forex sits at the heart. Here for example one aspect is to consider risk and the associated money flows since all trading and investing is in effect concerned with risk and return. And all instruments, in whatever market, will reflect this to a greater or lesser extent.

The JPY is a classic example of a risk currency which will be sold when market participants are risk averse and bought when participants are seeking safe havens. This in turn will be reflected in equity markets and associated currency pairs. A good example here is the AUDJPY which will not only reflect the balance between risk on and risk off, but also the relationship through to commodities, and in turn the US dollar. This is just one example of how the markets are inter-connected and how a relational approach will help you understand the linkages.

Moving to your second question, with regard to hammers and shooting stars, these are indeed found in all markets and in all time frames. A single candle is an initial early warning whilst a cluster within a congestion phase is a strong signal of either a buying or selling climax, and the forerunner of a reversal. When hammers or shooting stars first appear, never jump in on the first one as, almost always, markets take time to reverse. Remember the oil tanker, when the engines are turned off it will still keep going under its own momentum. This is how the markets behave, and in our case is where the insiders (or strong hands) are mopping any residual buying or selling before taking the market in the opposite direction.

Hope the above helps and thank you again for taking the time and trouble to write to me.

Kind regards – Anna

By Anna Coulling