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Rand moves: Respect the tide, ride the wave, watch the ripples - Part 2

May 01 2018 07:05
James Paynter

IN PART 1 of this series we looked at the analogy of how foreign currency markets like the dollar/rand can be related to the ocean, and how there are cycles and moods in each, with different degrees of forces or trends that drive their apparent ever-changing motion.

To quickly recap last week's post (if you haven't read it yet, please do so now before reading this one): 

A forex market has a primary trend (like the tides of the ocean), and you need to know what this 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!
The interesting thing about long term trends and tides of the ocean that we didn’t cover, is that these also have different moods and intensities. 
Sometimes you have strong market trends (like during spring tide), and at other times, lacklustre trends (like during neap tide). Knowing when each of these is in play and the characteristics of each is important to understanding and surviving the ocean – and the markets.

But that is not the whole picture.

While knowing the rand's long-term trend is essential, it is not sufficient for you to be successful in managing your forex exposures or trading.

The fact is – you can know the long-term trend and STILL lose money all along the way!

So, what else is needed?

That is the subject of today's article.

In any such market as the rand, there is not only a primary trend (likened to the tide), but a secondary (or intermediary) trend, which can be likened to the waves of the ocean.

As shown in the chart of the dollar/rand from 2011 to 2017 below, these secondary trends (shown in black) are superimposed on the primary trend of a market (shown in red)

           

Waves are affected by the tides, but also have their own moods, cycles and rhythm due to secondary natural forces. 

We know this from observation –

How, depending on what weather conditions and systems have prevailed in the region over the previous hours and days, the sea can have the most perfect of waves at times….
…while at other times it can be choppy, possibly to the point of being rough and dangerous.
And then, it can be almost waveless a couple of days later.

Surfers have learnt over time to read these signs of what weather conditions make up good surfable waves. In more recent years, forecasting this has become more accurate due to the use of sophisticated weather pattern-analysing technologies (like windguru.com and magicseaweed.com) instead of just gut feel.

An interesting and well-accepted fact too is that surfers will experience the best riding waves during a rising tide – when the intermediate trend is in the same direction as the underlying major trend

These are the waves that will give you the best, longest rides, when both forces are working in your favour, you can harness their power, and be carried effortlessly for the ride until all its power has been lost close to shore… 

…and then head out on the back current to wait for the next wave in.

And with the rand and other currency markets, it is no different. 

Depending on the prevailing sentiment at any time, the markets can be trending nicely, or be very choppy or even flat.

And to succeed, you need to understand what mood the market is in, and what is most likely to happen next. 

And just like weather-based forecasting systems, having a scientific-based system to forecast the rand and other financial markets – utilising the laws that  govern (human) nature in financial markets and  past market patterns to forecast future patterns – can be extremely useful…

…in giving you a heads-up as to whether a market is likely to stay flat, get choppy or start trending strongly.

Or the reverse trend.

And understanding how this relates to the underlying trend is also critical to how successful your ride is likely to be.As a trader (just like the surfer), your best ride will always be to catch strong trending waves in the same direction as the underlying trend, and ride them out until they have lost power. And then wait patiently for the next one. And as an importer or exporter:

• If the underlying trend is in your favour, your strategy would be the same as the trader, using it to your advantage within the period you have to exchange:

  • If the intermediate trend is IN your favour, use this to your advantage by waiting until the present trend is starting to run out of steam before exchanging.
  • If the intermediate trend is NOT in your favour, depending on how far the intermediate trend is likely to extend and the window period you have to exchange, you could wait for the trend to reverse and move back in the direction of the longer-term trend (of course with some price level to protect you in the event of an adverse move). 

• If the underlying trend is against you, don’t fight it! Look at the intermediate trend.

  • If the intermediate trend is IN your favour, use this to your advantage by waiting before exchanging, but expect it to be a lacklustre ride likely to run out of steam sooner rather than later. And then get out before you are caught in the strong backwash and lose all you have gained.
  • If the intermediate trend is NOT in your favour (or turning against you), look to exchange as soon as possible, before you lose any more.

I trust this has given you some valuable lessons in how we can learn from nature, and those around us who have learnt to harness its power – and enjoyed the ride as a result. Time and time again.And if you have rand forex exposures, you well know how it is – you miss out on a good run, or are burnt by a sudden reversal, because you lacked the knowledge of where the market was, or where it was likely to go … and were likely driven by your subjective emotions.

This is why you need some objective analysis to help you understand the underlying trends and patterns in different timeframes and how these are in relation to one another at any point in time......and one which gives you the full picture of how the rand is expected to behave going forward – based on past and current patterns.

The result is being able to use the market to your advantage, by knowing when to stay in for the ride, and when to get out while the going is good!I trust you have these two articles in this three-part series – and that it has given you a different perspective on the markets.  

You will now see that:

  • Understanding the rand's primary long-term trend (like the tides of the oceans) is essential to ensure you are not fighting the primary trend of the market (see Part I).
  • In order to be successful, you also need to understand the intermediate trend (like the waves) to ensure you optimise your forex decisions exposures, enabling you to limit your risk in when the market is against you and benefit when the market moves in your favour. 
  • And that an objective, scientific-based view of the market will enable you to make educated, informed and rational decisions, instead of emotionally-charged irrational ones (which we will default to every time). 

But there is another critical element to being successful in these markets.

Watch out for the next instalment, where we will cover this in detail.

* 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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