How to choose Forex trading strategies for South Africans
It’s one of the most difficult jobs to earn a lot of money. Forex trading is not one of the most straightforward ways to make money, despite what many novice traders in South Africa may think. A lot of SA traders fail and many of them lose their accounts in trading before they know how to use the market for Forex in their favor. Although there are some traders who succeed with Forex trading but their numbers are low when compared to the majority that loses. Most traders don’t realize that they are in control and could alter the odds in their favor and dramatically improve their chances of success if they wish to. The primary reason that most traders fail to make it through the market is due to their ignorance.
In the 21st century, in which the buzzword of the moment is knowledge it’s not only a matter of being a hard worker, but also the matter of being smart. The key to knowledge is that it opens many doors if you’ve got a deep understanding of how something functions then you will be able to think of strategies to use the information you have for your benefit. This is true for the Forex market too. You must not only be aware of and comprehend how the Forex market operates, but also be able to be aware of your own and the feelings of other people. You must be able to recognize high-probability trading setups and control your money effectively.
In every transaction in Forex, there are winners as well as losers. The goal is to earn greater overall profits in comparison to losses for a long period of time and become a total winner. The method of the very best South African traders to achieving consistently successful trading is based on three primary pillars, which are known as the 3Ms: Mind, Money, and Method. There are numerous methods of trading Forex, including spot Forex, futures, options, or spread-betting. This article will concentrate on the trading strategies for spot Forex.
What you should know before choosing a Forex strategy
The Forex industry in South Africa offers the promise of quick actions and enormous gains, but the risk is equally high. It is estimated that more than 90% of traders in the South African Forex market are quick to lose their capital invested in trading. The positive side is that the majority of these losses could be avoided by learning how to trade in the Forex market and also by using effective financial management.
What affects Forex exchange rates?
The swift fluctuations in exchange rates for currencies are the reason why speculators flock into the Forex market, as currency rates are extremely sensitive and therefore react rapidly to the changing economic conditions of regions or countries, such as changes in rates of interest, and political developments across the globe. Sometimes, central banks of nations are able to intervene in the market for Forex if policymakers believe that their currency is either too strong or weak to be beneficial for them. All of these causes result in extreme volatility of prices for currencies that can be exploited by traders who make bets on the direction and the magnitude of future and current price fluctuations.
Going long or short
Since currencies are exchanged in pairs, when you are on the bullish side of one currency, you’re in a negative position on the other and reverse. If, for instance, if you are bullish for USD/ZAR you can go long on it by purchasing South African rands and then selling US dollars. If you’re bearish you could trade it short by trading South African rands and then buying US dollars. It is possible to trade a currency whenever you like, with no limitations. This is in contrast to some markets, where short-selling is only permitted on an increase and it can be extremely time-consuming for stock traders to wait for the market fall, as they wait for an increase before they are able to short.
Being able to go either long or short on currency pairs at any time is an incredible benefit as Forex traders can profit from both the up and down movements at any time and that translates into an efficient and quick execution of orders. This is particularly beneficial when it comes to financial markets, where time is money and even a single-second delay can be costly.
Investing versus trading
There are a few important distinctions between trading and investing, although neither is superior to one – they each have different functions. Some people might employ these terms interchangeably, without a lot of thought about what they mean. There are advantages both ways, however, when it comes to boosting your wealth through the market for Forex trading the superior method is trading because of the distinctive features of the market.
Investors are anxious about taking the right to own the financial instrument. They believe in the financial instrument’s ability to increase in value. They are inclined to “buy low and sell high”. For instance, if they notice that the price of the share is falling, they could think it’s a good opportunity to purchase and hold the share at a bargain price to make make money when the share moves up in the future. Investing in shares is very different from trading the currency pairs.
Traders, on the contrary side, do not show any concerns about the purchase and holding of an instrument. They have the same comfort when it comes to either buying or selling the instrument. Contrary to investors, traders are more prone to buy high in the hopes of being able to sell higher, or short-sell low in the expectation of being able to purchase the instrument later on at a lower price.
Choosing your strategy according to time frame
There are dozens of Forex trading strategies in South Africa or anywhere else that traders can choose from. But it simply does not work this way. You cannot pick just any strategy and hope for it to work magically. You have to understand what are the benefits of each strategy when they perform the best, and when they are extremely weak, thus better to be avoided. Also, you have to match your trading style, risks, budget, and skills with the strategy. There are several ways to classify trading strategies and put them in different categories. One of such distinctive categories is time-frame-based trading strategies, which we will cover below.
The trader’s aim is to earn money regardless of the direction the market moves regardless of whether it is upward or downward in a short timeframe. While there’s short- and long-term trading, the duration of holding is rarely over more than one or two months, or more than a year in rarest cases. Before entering the market, you must know in advance when you’ll leave the market. The trader isn’t going to be able to hold the position for long. If you decide to keep the position for say for a week, your goal for profit is likely to be higher than if you remain in the position for only a couple of hours, because it is expected for prices to increase within the longer duration of time.
We can classify trading strategies according to four different timeframes:
- day trading
- swing trading
- position trading
Scalpers are the shortest time-frame traders focused on the slightest changes in the prices of currency pairs. Hence, it requires the ultra-rapid action of both position opening and closing. Frequently, these actions happen within a few seconds or minutes after opening a trade. However, the profit is very small in scalping – usually managing to steal a few pips on every trade. This means that scalpers have to trade incredibly many times to gain significant earnings eventually.
If you are using scalping in South Africa, you need to access the tightest spreads and ultra-fast execution speed platforms. The advantage of the strategy is that even if you lose on trade it won’t drain your trading capital. But, bear in mind that not all brokers allow scalping since they struggle to cover the opposite side of the opened positions within the extremely short time frame.
Day trading is one of the most common Forex trading strategies, especially among novice South African traders. Due to its simplicity, day trading is often considered the best Forex trading strategy for beginners. It means that a trader opens and closes the trade within the same trading day. The day traders never hold positions overnight, which is somewhat beneficial, as well, as it frees them from the rollover fees (overnight charges). However, as the name might mislead the traders, day trading does not mean holding a position for 10 to 20 hours. Quite the contrary, day traders might hold positions from minutes to few hours.
Day traders are often momentum traders relying on intraday momentum and expecting the existing price to reach the desired level in a single direction. They heavily incorporate trend trading strategies and sometimes use Elliott Wave analysis to understand the price patterns and reactions from the trading community. The day trading strategy in South Africa requires more patience than the scalping strategy and involves intense concentration and close monitoring of the price charts.
Swing trading strategy stretches from few days to more than a week in rare cases. This trading strategy requires much more pre-trade analysis than the two strategies we discussed previously. The South African swing traders need to identify trends early in the central objective. Thus, swing traders will not enter the market when the conditions are already perfect, but most likely a few days earlier to be ready for exiting the position when the desired price level sets in. These kinds of traders often implement complex technical analysis tools and look at historical price charts with Economic calendar trading and market news analysis to set expectations for future price fluctuations.
In contrast to scalpers and day traders, swing traders have to endure the overnight risk. It also means that swing traders pay for rollover fees on overnight positions, which is always included in the pre-calculation of the trading costs. But the overnight positions employ a greater risk since many events can occur while the trader sleeps and it can affect the price direction until the next morning. However, on the good side, swing traders do not need to spend every minute in front of the screen. Thus such a strategy is often preferred by full-time employed people who have day jobs and a lot to take care of during the day.
Position trading is the rarest Forex trading strategy and spends the longest period of time. It ultimately means holding the positions for several weeks or even a few months. The position traders will often seek the reliable and stable currency pairs such as EUR/USD or nearly any other major currency pair, as they tend to fluctuate less. Furthermore, the spread on majors is much cheaper, meaning that position traders have less trading costs even if they also need to pay for rollover charges. These traders are the most frequent utilizes of Elliott Wave and trend pattern analysis to correctly plan their market entrance and exit.
The position traders look for assets signaling that a medium to long-term trend is in place. They will rush to close their positions before the existing trend runs out of power. If you are a full-time worker, with a lot on your mind and very little time for everyday trade monitoring then position trading is the best Forex trading strategy in South Africa that you can get. You can even place a trailing stop which will automatically close the position as soon as your desired price target is hit.
Technical VS Fundamental trading
There are three general types of Forex traders in relation to the things they decide to base their trading decisions on:
- the trader using sole technical analysis
- the trader using sole fundamental analysis
- the trader who mixes both fundamental and technical aspects
Every trader type is unique in their method of looking at the currency market, based upon the individual’s own views.
A trader who is a follower of technical trading strategies in South Africa believes that data from the past plays an important role to play in forecasting price movements in the future. Thus he or she is devoted to the analysis of currency price charts employing various tools for chartings, such as levels of resistance and support as well as trendlines and a variety of indicators on charts to learn about the behavior of prices over time in order to anticipate the direction of the market in the future. Actually, the use of technical analysis of the market for Forex is so common in the market that self-fulfilling predictions often happen at prices at which people’s reactions are predictable. In other words, you can tell if most traders buy or sell at those prices due to their historical importance. Technical traders believe that all that’s to be discovered regarding the marketplace has been incorporated into the price currently in place.
The other class is the fundamental trader, who evaluates and weighs economic news and data pertaining to the country that holds a specific currency to make an accurate assessment of the worth of the currency in relation to the other. They believe the rate of exchange for currencies is mostly influenced by geopolitical and economic conditions apart from central bank intervention and will monitor economic indicators like trade balances, inflation rates, and gross domestic product (GDP) as well as the rate of unemployment, interest rates, and the like. They also are concerned about what policymakers will speak about the monetary policies of the nation and will keep track of the speeches scheduled.
Best of both worlds
There isn’t any one-size-fits-all strategy or formula that will achieve that impossible target because people involved in the financial market change with the changing conditions of the market even though some old ways of doing things die. Although there is no secret recipe, there are definitely certain ways to trade on the Forex market. The advantages to analyzing the Forex market using both of these areas are abundant and it is too strict to choose one field and not consider the other. The most successful traders make decisions about trading using a mix of both fundamental and technical factors to gain an understanding of the general market’s mood, and then choose to either trade on that sentiment or be against it by taking an opposite approach.
The 3 most popular trading strategies in South Africa
1. Market Sentiment
Market sentiment is how the vast majority of market participants seem to think about the market. It’s the main aspect that influences the Forex market. This is because traders are prone to act in accordance with their feelings and opinions of specific currencies, in terms of their strength or weakness in relation to other currencies. Market sentiment summarizes the general mood that is felt by the majority of market participants. It also determines the current behavior of the market as well as the foreseeable direction that the market takes.
The direction taken in market participants in the Forex market is in fact a reflection of the market’s current mood that in turn influences others’ trading choices, regardless of whether they should short or long an exchange. When making educated decisions in trading traders need to consider various variables that can influence the direction of a currency prior to making their decision on the present and future status of specific currencies. It is important to remember that market sentiment isn’t rational; it is mostly dependent on the emotions of traders which is actually one of the biggest and, perhaps the most important aspects in the determination of a currency’s exchange rate.
2. Trend riding
A lot of traders adhere to the frequently repeated “the trend is your friend until the end” rule. The ability to ride the trend is like using the full power of the direction of the wind to steer your boat towards the destination you want to reach. When it comes to the market for Forex, trend-followers are able to capture any trend, regardless of whether it’s increasing or decreasing to make the best trading returns.
Forex generally has market trends, regardless of what time frame you’re watching – they tend to be created on daily, hourly, and weekly charts. This is because prices for currencies are dependent on the underlying macroeconomic variables that determine the market participants’ opinions of where prices should be beheaded. With trends likely to have an extremely long life span, extending to months and even years it’s not surprising that investors and traders rely on the idea of tying themselves to trends with the goal of making huge profits from the beginning to the end.
3. Breakout fading
Levels of resistance and support whether they’re found within charts, indicators, or even along with trendlines, provide a sign of when the price reaction is likely to occur. A support level is a point at which the selling pressure exceeds buying pressure to stop or reverse a trend. A strong support level will be more likely to last even when prices have a slight chance of piercing through the support and it also provides traders with a great buying opportunity.
In contrast, a resistance level indicates that selling pressure is sufficient to take on buying pressure so that an uptrend could be temporarily stopped or reversed. A level of resistance that is strong will more likely impede further growth even when prices do not quite break through the resistance. The situation provides traders with a great shorting opportunity.
Fading breakouts are when you trade against breakouts, or when you think that the prices of the currency are not capable of sustaining a follow-through movement to directions of breakouts. We fade breakouts when believing breakouts that occur from support and levels of resistance to prove untrue and unsustainable, especially if the levels of support and resistance are significant. Most breakouts fail within the first couple of attempts, which makes the process of fading breakouts a great short-term strategy for traders in Forex.