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IT SEEMS that every second day the rand is hitting five-year lows against the dollar, pound and euro and the necessity to make accurate and effective foreign exchange decisions is more critical than ever.
The questions everyone is asking is: Can the rand get any weaker, or is a turn imminent? If so, how long before the turn and how deep will it be?
Do we expect the rand to recover to R10.50/$, R10.20/$ or even sub-R10 levels - or do we expect greater depreciation to R11.50/$, R12.00/$ or even higher?
To answer, we have to look at two schools of thought – those of fundamental and technical analysts.
Fundamental analysts regularly provide reports and insights to their conclusion of why the rand has moved, and sometimes provide a prediction based on the relevant information where they believe it might go. Mine strikes, emerging market sell-off, weak growth forecasts and GDP data are some of the reasons given for the movement in the currency.
Technical analysts, on the other hand, believe that there are too many factors and too many role players impacting a currency to accurately predict how information and events will influence currency traders to buy or sell.
They look at price, and through the use of complex mathematical algorithms and indicators find patterns in the movement of price to guide decision making. Moving day averages, head and shoulders and Elliott wave theory are examples of models used by technical analysts.
Both have their place and both can be very accurate – but how do you know which one to follow, and when? How do you know if you are going to make or lose money based on the information and predictions provided by these analysts?
Looking back at the two significant periods of depreciation of the rand since the start of the millennium and the time taken to recover back to the same pre-spike levels:
Now looking at the current period of depreciation of the rand since 2012:
Analysing the graphs above you can easily spend months finding comparisons, identifying trends and evaluating the fundamental reasons for each depreciation and appreciation, but it will still not bring you any closer to understanding what it will do next.
The reality is that the rand has depreciated and appreciated due to a vast number of reasons in the past 15 years, and will depreciate and appreciate due to a vast number of reasons in the future.
It becomes less of an exercise in understanding the intricacies of the trade world, and more about what drives human behaviour into making decisions. Fear brought on these periods of extreme depreciation, not financial numbers and performances.
Fear, anxiety, sentiment, opportunities, risk aversion, risk-taking, greed, whether rational or irrational – this is what drives our decision-making and ultimately determines the buying and selling in the foreign exchange market.
Consider thus for a moment that the rand/dollar chart is not financial numbers plotted on a graph as is commonly believed – but rather mass psychological patterns of fear and greed: human emotion.
Where to from here?
Price, however, is the summary of all fundamental data, completely interpreted by all market participants, with all possible other influences already taken into account. Nothing moves faster than price – by the time influential news reaches you on the radio/television/internet, price has already discounted it.
If the price patterns were formed based on the latest financial, social and economic data there would be no way to predict possible future movement. But, as price is driven by human emotions, and human emotions recur and form patterns, it becomes possible to search for, identify and then make predictions based on how human traders reacted in similar circumstances in the past.
Computers allow for fast testing of the accuracy of algorithms against market data for long periods of time. Twenty years' worth of data can be analysed in a few seconds. Once an algorithm displays a consistent mathematical edge, such an algorithm can be used on live data feeds to provide a clear and unambiguous indicator of the most probable future movement.
Exact, cold mathematics.
- Fin24
*Johann Strauss is CFO and co-founder of Forex Forever.
The questions everyone is asking is: Can the rand get any weaker, or is a turn imminent? If so, how long before the turn and how deep will it be?
Do we expect the rand to recover to R10.50/$, R10.20/$ or even sub-R10 levels - or do we expect greater depreciation to R11.50/$, R12.00/$ or even higher?
To answer, we have to look at two schools of thought – those of fundamental and technical analysts.
Fundamental analysts regularly provide reports and insights to their conclusion of why the rand has moved, and sometimes provide a prediction based on the relevant information where they believe it might go. Mine strikes, emerging market sell-off, weak growth forecasts and GDP data are some of the reasons given for the movement in the currency.
Technical analysts, on the other hand, believe that there are too many factors and too many role players impacting a currency to accurately predict how information and events will influence currency traders to buy or sell.
They look at price, and through the use of complex mathematical algorithms and indicators find patterns in the movement of price to guide decision making. Moving day averages, head and shoulders and Elliott wave theory are examples of models used by technical analysts.
Both have their place and both can be very accurate – but how do you know which one to follow, and when? How do you know if you are going to make or lose money based on the information and predictions provided by these analysts?
Looking back at the two significant periods of depreciation of the rand since the start of the millennium and the time taken to recover back to the same pre-spike levels:
Now looking at the current period of depreciation of the rand since 2012:
Analysing the graphs above you can easily spend months finding comparisons, identifying trends and evaluating the fundamental reasons for each depreciation and appreciation, but it will still not bring you any closer to understanding what it will do next.
The reality is that the rand has depreciated and appreciated due to a vast number of reasons in the past 15 years, and will depreciate and appreciate due to a vast number of reasons in the future.
It becomes less of an exercise in understanding the intricacies of the trade world, and more about what drives human behaviour into making decisions. Fear brought on these periods of extreme depreciation, not financial numbers and performances.
Fear, anxiety, sentiment, opportunities, risk aversion, risk-taking, greed, whether rational or irrational – this is what drives our decision-making and ultimately determines the buying and selling in the foreign exchange market.
Consider thus for a moment that the rand/dollar chart is not financial numbers plotted on a graph as is commonly believed – but rather mass psychological patterns of fear and greed: human emotion.
Where to from here?
Price, however, is the summary of all fundamental data, completely interpreted by all market participants, with all possible other influences already taken into account. Nothing moves faster than price – by the time influential news reaches you on the radio/television/internet, price has already discounted it.
If the price patterns were formed based on the latest financial, social and economic data there would be no way to predict possible future movement. But, as price is driven by human emotions, and human emotions recur and form patterns, it becomes possible to search for, identify and then make predictions based on how human traders reacted in similar circumstances in the past.
Computers allow for fast testing of the accuracy of algorithms against market data for long periods of time. Twenty years' worth of data can be analysed in a few seconds. Once an algorithm displays a consistent mathematical edge, such an algorithm can be used on live data feeds to provide a clear and unambiguous indicator of the most probable future movement.
Exact, cold mathematics.
- Fin24
*Johann Strauss is CFO and co-founder of Forex Forever.
