Trading on the foreign exchange (forex) market can benefit importers and exporters, but “trading with the trend” is risky and has its caveats.
There is no hard and fast formula that will guarantee a trader’s results, warns Citadel Global, renowned professionals in foreign exchange and treasury markets. “We are concerned about the current rise in speculative trading, especially on risky software platforms. For those considering entering this market, it is strongly advisable to seek out reputable traders who boast skills developed over years of experience, knowledge of the markets and highly honed instincts, proven by a solid track record. People are getting hurt financially,” cautions Bianca Botes, Director at Citadel Global.
Botes says certain factors must be taken into consideration when trading in forex such as the relative strength of currencies, geopolitical and economic events, supply chain and transport disruptions, Gross Domestic Product (GDP), interest rates, employment levels and the trade balance.
WHY YOU SHOULD NOT TRUST SOFTWARE INDICATORS
While there are software tools available to help identify market trends, they are merely one of the tools available. Botes advises prospective traders to avoid sites which offer guaranteed returns based on “forex trend predictions”. “There is nothing which can replace years of expertise and sensitivity to trends and market behaviour gained through hands-on involvement,” says Botes.
For importers and exporters the objective should be to manage the risk associated to trading the volatile rand, rather than forex profits from taking a speculative stance in the market.
IDENTIFYING LEVELS OF SUPPORT
Traders often refer to and rely on identifying support levels, which is simply the price beyond which an asset will theoretically not drop, because at that point, buyers tend to step in, causing the market to rise again. “Another important factor is the resistance level, which is the ceiling beyond which prices cease increasing, and it starts to signal the end of a particular trend. Being able to juggle all these variables and make informed decisions is key to profitably utilising market trends,” adds Botes.
HOW TO MAKE USE OF HISTORICAL DATA
Historical data analysis, the study of markets’ behaviour over a lengthy period, is an invaluable tool when trading in forex, but once again it should be used as merely one of the tools in your toolkit, since not all historical market data offered by providers is sufficiently comprehensive or nuanced, says Botes.
Traders still need to keep their fingers on the pulse of a wide spectrum of events and trends to determine the most profitable and safest options, says Botes. “Successful traders identify the trends with the most potential and select a low-risk entry point. Traders must have a stop-loss in place to get out if they happen to be wrong as well as exit rules to leave when the trend changes.”
There are three types of analysis that should be conducted: (1) technical analysis, which traces price movement, looking for patterns and predicting possible future movements; (2) fundamental analysis which looks at economic, social and political factors; and (3) sentiment analysis, which is a psychological approach, noting how traders feel about the market.
“It is important to be able to recognise patterns and triggers, in a system called ‘backtesting’, and although automated trading systems are available to determine this, being able to interpret and respond to prevailing market dynamics by a skilled and experienced trader still serves its purpose in an environment where advice is key” says Botes.
Trends and algorithms can be trusted up to a point, but unforeseen circumstances, such as disasters, weather events or political upheavals can arise, which can lead to rapid and significant losses. “The reality is there is always a fair amount of market volatility, and no-one can predict the future. It takes years of honed wisdom and a holistic, forward-looking view to navigate the forex landscape and hedge against risk,” says Botes.