The forex market has really grown across the border, not only in South Africa but also worldwide. What used to be a simple, secluded market for banks and prominent financial institutions is now open for almost everyone, with daily trading amounting to about $5 trillion.
Of course, anyone who has been in this field long enough would agree that to be successful, you must have a good deal of knowledge.
Actually, a recent report by the Financial Times noted that up to 70% of DIY investors lose money frequently. So, whether you are an expert or a novice seeking more knowledge, you need not worry. This article is well-curated just for that.
Understanding the forex market
Questions like, ‘What is forex trading and how does it work?’ are very common in the sector, especially among starters. But well, it’s not something very magical as all that happens is buying a currency while selling another, all at once. Think of it this way: You have some rand which you think will strengthen against the US dollar, so you opt to buy the rand and sell the dollars.
The most striking part is that there is no central marketplace. What happens is that multiple computers across the world facilitate over-the-counter currency trading. Running for five days a week, main markets operate 24 hours a day. Some of the common terms you will hear are base and quote currencies. Base currencies are usually to the left of a currency pair, while the quote is usually on the right.
Most popular trading strategies for South African investors
Price action strategy
This strategy relies heavily on price changes and is minimally or not dependent on indicators. To predict the market direction, you need only look at chart patterns, support and resistance levels, and how candlesticks form. This is where historical price patterns and market emotion come in handy.
Fundamental analysis strategy
Fundamental analysis goes a step further in looking at press releases, geopolitical events, and so on. This is where you consider factors affecting the South African Rand in both local and international landscapes. So, you may want to keep a close eye on:
- Political changes
- Inflation rates
- GDP shifts
- Interest rate choices, etc.
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Range trading strategy
You are perhaps aware of consolidating markets, which often trade between two known levels of support and resistance. To tell whether a market is rangebound, just draw trend lines between highs and lows. If the lines appear flatter, it is a rangebound market – the highs are similar levels in the same way the lows are.
Most people tend to use this strategy because markets often move in a single, strong direction in an instant. So, if you favour short-term styles of trading, like day trading, this can be a great option.
Carry trading strategy
In carry trading, the aim is to benefit from the interest rate differential between two currencies. A trader borrows money in a currency with a low interest rate and invests in one with a higher rate.
But there is a caveat: you have to carefully assess the market conditions, as this strategy is quite risky. Consider factors like global market conditions and interest-rate differentials if you adopt this strategy.
Breakout trading strategy
Breakouts happen when an asset price shifts outside a specified support or resistance level in large volumes. After the asset trades beyond the perceived barrier, you enter a long position. A good number of experts believe that this is a great way of managing risks more effectively.
Top tips to consider
You’d be amazed to learn that most of the traps that South African investors fall into are things that can actually be avoided. For instance, when traders lose a significant amount of money, they normally overtrade to cover the losses. So, you will find a trader placing more orders than usual or trading with higher volumes as a way of recovering. But the downside is that most of these decisions are poorly thought-out, increasing the risk of more losses.
A good trading plan can help avoid emotions from taking over your trading decisions. This may include strategies for entering and exiting trades, investment goals, etc. Plus, you do not just want to have a plan and don’t stick to it rigidly.
Adding stop-loss features can be a great way of improving your experience. How much are you willing to lose per trade? Use such limits to set stop-loss orders and reduce the emotional burden that comes with deciding when to sell.
And it goes without saying that paying attention to the overall market trend is important. Unless you are an experienced trader who knows what you are doing, beginners may want to focus on the general market trend to minimize risks.
Who can deny the fact that knowledge is power? And more so, in a sector like forex, where a lot of factors affect market trends, you cannot afford to be ignorant. This is not just limited to South African traders but also includes everyone seeking to join this industry.
Just as we have already highlighted, a good percentage of traders are already losing money because of ignorance, and you don’t want to be part of such statistics. Try implementing some of these strategies to ensure you are ahead of the game.
