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Rand moves: Respect the tide, ride the wave, watch the ripples - Part 3

May 08 2018 06:01
James Paynter

WELCOME to the last in this 3-part series of articles, in which we have shown how financial markets like the rand can be likened to the movements of the ocean, with both having different degrees of trend and cycles, moods and patterns.

And the rand has certainly been putting on a fine display in showing us this working in no uncertain way the past few weeks.

To recap what we discussed in these (please read them first if you haven't - very important):

In our first article, we covered the primary trend of the market which can be likened to the ocean tides.

In the second article, we spoke about the secondary trends which can be likened to the waves and are smaller degree (more frequent) trends within the primary trend (the tide). And then, in order to be successful in the foreign currency market, you need both of these:

  • You need to know what the primary trend is, and how far that trend is likely to continue, so you can use this to your advantage. Fighting the tide is a recipe for disaster!
  • You also need to know understand the intermediate trend – what mood the market is in, and have some system to know whether it can be expected to be trending nicely, or be choppy, or even flat - or maybe reverse trend. Taking a decent wave is dependent on being ready beforehand!

As mentioned, like a surfer, we need to catch the wave early and ride it until it has lost its power. And then we need to look for the next.

But what is the crux in taking a successful wave?

Positioning, timing... And then action!

And this is where the minor trend comes in, which can be likened to the ripples on the waves. Catching a successful wave is dependent on being in the right position, then waiting for the ripples on the wave to tell you the wave is at its optimum position to take a ride.

And then to also tell you when the wave has lost most of its power. 

How often have you seen what looks like a perfect wave building up, and yet surfers have missed this wave because:

• they weren’t in the right position when the ripples on the wave were close to peaking.

• or they started paddling too late or too early – and came off second best!

• or they didn’t paddle at all, or they started, then pulled out at the last minute.

And when it comes to the rand –

• how often have you seen the market move, but you were not in a position beforehand to take advantage?

• or you were in the right position, but took action too early, or too late?

• or you were in a position to take advantage of a move, and then pulled out at the last minute, or did nothing at all?

Sound familiar?

The fact is, if we have been involved with forex exposures for any time, we have all been there. Such is surfing, and such is the rand – and every other financial market.

The bottom line  

You need to know the market in three different degrees - long-, medium- and short-term - to be really successful.

Below is a chart with these three trends superimposed on them – primary, secondary and minor.

     
rand moves

 

And as you can see, although the minor trends (ripples) are merely a small trend superimposed on two larger degree trends, the minor (short-term) trends are a critical factor in determining whether you have a successful ride or not, and when to enter and exit the market.

Remove emotion from your decisions

But then what is probably as critical is that we do NOT let our emotions take control at the last moment, but that we use an objective proven system that removes emotion from the decision-making process. 

And then simply take action – even when our fears are screaming for us to pull out. The result – an exhilarating ride!

BUT…how do you protect yourself from making wrong decisions at these points of extreme sentiment, whether positive or negative?

By making sure that you have an objective, scientific-based view of the market that enables you to make educated, informed and rational decisions, instead of emotionally-charged irrational ones (which we will default to every time). 

I trust this 3-part analogy series has made sense and has resonated in some way, and hopefully changed the way you view the market and approach your exchange decisions.

* James Paynter is a financial market analyst and founder of Dynamic Outcomes. Views expressed are his own.

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james paynter  |  equities  |  opinion  |  rand  |  markets
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