An analysis-based trading strategy seeks out particular market circumstances and price levels. Predicting market fluctuations using fundamental analysis is possible, but most systems zero in on particular strategic indications.
Every trader needs to be aware of the distinctions between "style" and "strategy," despite the widespread misunderstandings between the two. Trading styles are general plans for how frequently and for how long you will trade, while strategies are more detailed methods for determining exactly at what price points you will join and exit transactions.
Your trading style encompasses your preferences for market or instrument trading, including the frequency and length of time you trade. You can adjust your trading approach in response to market movements, but that depends on your decision to stay in the trade or wait for more advantageous conditions.
Mastering Forex trading requires the right strategy. In this guide, we reveal five proven strategies designed specifically for South African traders. Whether you're a beginner or experienced, these insights will help you trade smarter and maximize profits.
What is Forex Trading?
When you trade foreign exchange (Forex), you bet on the value of different currency pairings. People trade foreign exchange (FX) for both practical and financial reasons.
Before diving into more complicated forex trading strategies, even seasoned traders should brush up on the fundamentals.
The currency pair is the standard unit of measurement for the value of one currency relative to another in foreign exchange trading.
For instance, in the case of purchasing the EUR/USD pair, the base currency is the EUR and the quote is the USD. If you believe the base currency will appreciate compared to the quoted currency, you will purchase the forex pair. If you believe the inverse will transpire, you will sell.
In the previous example, you would buy EUR/USD if you expected the euro to rise relative to the dollar, and you would sell it if you believed the opposite to be true.
Untrained observers may assume that traders simply need to forecast the movement of a currency pair and reap the profits. But there are methods for entering and leaving a profession that you can employ.
Forex Trading Strategies for South African Traders that work
Forex Scalping Strategy
A common strategy in foreign exchange trading known as "scalping" entails opening and closing numerous short-term trades (seconds or minutes) on various currency pairs throughout the day. Scalpers often open and close multiple positions during a trend, not just one at the start and one at the end.
When it comes to forex scalping, there are a number of indicators that can be useful. Among these, you can use moving averages to identify established and developing market patterns and Bollinger bands to pinpoint regions of extreme volatility. The stochastic oscillator is another indication that traders can use. It compares the present value of a currency pair to its range over the past period.
Gaining several smaller gains rather than a few bigger ones should be your goal; therefore, aim for a few pips at a time. A "pip" is a four-decimal-place price change. A one-pip drop would be the quoted price of a currency pair going from 1.3981 to 1.3980.
Scalpers frequently use CFDs to trade currency pairs expected to rise or fall in value. If you anticipate a potential increase in price, you will "buy" (go long) and "sell" (go short) correspondingly.
The ability to initiate a position with a deposit, known as margin, is a feature of leveraged products such as CFDs. The whole value of the position is used to compute your profit or loss, which might increase your profits—but it can also increase your losses. You should always have a plan to mitigate risk, regardless of the scalping strategies you employ.
Hedging as Trading Strategy
Hedging is a sophisticated trading strategy that helps reduce the risk of foreign exchange. Any gain or loss from an open position can be mitigated by hedging. Keep in mind that hedging can help you limit your losses, but it won't usually result in a profit.
To engage in hedging, one must choose two positively correlated currencies, like the GBP/USD and the EUR/USD, and then take positions in the inverse direction on both pairs.
Imagine, for the sake of argument, that you have shorted the EUR/USD at the current high price range, but the currency pair is now showing signs of strength and is poised to breach upward.
You could then open a long position on the GBP/USD to hedge against USD exposure. You would not lose money on your short position if you had a long GBP/USD hedge in place in the event that EUR/USD continued to rise, meaning the US dollar declined. Your long position on GBP/USD would have lost money if the euro fell against the dollar, but your return on EUR/USD would have made up for it.
While both of your positions are open, it is possible that the net profit will be less than zero. But if you time the market well, you can increase your profits even more. Instead of closing the first trade while you're ahead, you can hold on to your profit until you put the offset currency pair position (in this case, GBP/USD) on. Just like an insurance policy might shield you from the financial impact of a costly automobile crash, hedging can help you weather a major loss.
Trading Forex Options
One way to secure the right to buy or sell a currency pair at a specific price and time is by trading options. Forex options allow you to buy or sell at a later period rather than settling the transaction upfront and paying the value to a third party.
The right to purchase or sell the underlying currency pair stated in the options contract can be "exercised" at any time, but it is not mandatory. The maximum loss (the "premium") is your initial investment, which was the option price.
A foreign exchange option is an agreement to buy a currency pair at a future date and price set in advance.
If you're worried that the EUR/USD pair might drop to 1.18 in overnight trade, you might consider taking a long position at 1.20. Put a stop loss at 1.1750 to limit the loss to 250 pips if you don't want to lose too much capital.
An alternative to using a stop loss is to get a night-time option with a strike price of 1.1750. Your long EUR/USD position is profitable, so even if the currency pair never reaches 1.1750 overnight, you would only lose the little premium you paid for the currency option. You would only lose 250 pips due to your option profit if the EUR/USD pair dropped to 1.1750.
Position Trading Strategy
When you "buy and hold" a trade for an extended period of time—months or even years—depending on your trading strategy, you are engaging in position trading. The fundamental analysis of a country's economic data, monetary policy, and macroeconomic outlook would form the basis of your strategy, given the long-term nature of this type of approach.
Ensure your account has sufficient funds to sustain long-term trading. These should prevent margin calls and short-term swings.
In position trading, your total exposure to a currency pair is the deciding factor. You'll use contracts for difference (CFDs) to bet on how the currency market's prices will go.
Within this strategy, you can make use of a number of technical indicators, like moving averages, to enter and exit trades; this is common in trend trading, for instance. Looking at the levels of support and resistance is another strategy to consider while trading forex.
Ichimoku Clouds as a Strategy Tool
One technical analysis technique that takes market trends, momentum, and other data points into account is the Ichimoku cloud, which combines numerous averages. To apply this indication, simply draw five lines on a price chart using the above calculations:
- Tenkan-sen, which is the conversion line
- Kijun-sen, known as the base line
- Senkou Span A, known as the Leading Span A,
- Senkou span B, known as the Leading Span B
- Chikou span, known as the lagging span
Your software will display a technical indicator known as a "cloud" on the chart once it has calculated and displayed the lines. It shows potential levels of support and resistance where a price could encounter them. When Leading Span A (Senkou Span A) builds a bullish cloud and climbs over Leading Span B (Senkou Span B), for example, it would confirm an uptrend. The formation of a bearish cloud, in which Leading Span A falls below Leading Span B, is another indicator of a downtrend.
Price increases are likely to occur if the candlestick's location is above the cloud. If the price falls below the cloud, it means that the trend is probably going downhill. Conversely, a market in transition would have prices inside the cloud.
As you gain experience in trading, you'll discover that sophisticated strategies such as the Ichimoku cloud approach become intuitive.
Conclusion
Foreign exchange trading lacks a universal solution. What makes a difference is how you trade, where you're located, and the state of the market.
Traders from South Africa who want to make it big in the forex market need to put proven techniques and strategies into action. Making a detailed trading plan and using stringent risk management procedures are essential for traders who use price action, fundamental research, breakout, carry, or range trading strategies.
Optimal and long-term performance in trading requires constant learning, adjustment, and understanding of market trends.
Foreign exchange trading carries significant risk, so it's crucial to conduct thorough research and seek advice from a professional before engaging in a live trading session.
For instance, traders in the UK or India might do better with swing trading, whereas scalping could be more effective in Dubai's fast-paced markets. Finding a method that works for you in terms of your character and objectives is crucial if you are a trader in South Africa.
