USDZAR is an exotic currency pair. Have you ever tried to trade USDZAR? Did you read the post on 42-252 Trend Trading Strategy? In this post I show you how to use SMAs in building a robust trend trading strategy. Trading trends is what makes fortunes. Trading exotics pairs is an art that requires a lot of skill. South African Rand (ZAR) has been plummeting hard in the last few weeks. The recent shock came when South African President sacked the Finance Minister this forced the Rand (ZAR) to tumble down again and USDZAR as a consequence rallied hard. If you want to trade exotic pairs then you should keep an eye on the political events that happen in that country especially those related to the economy. Take a look at the following screenshot of USDZAR.
As you can see USDZAR is in a downtrend for a pretty long time. This is the H4 timeframe. So this downtrend is solid. Now take a look at the above screenshot of USDZAR just above the red arrow. You can see a strong bullish pinbar. This pinbar was formed when the news of the sacking of Finance Minister became public. After that you can see USDZAR changed direction and rallied hard. So this is an important lesson for you. You should know this are currency markets can change their market in a moment. So you should not think that this rally will continue for a long time. Watch this video on a top naked swing trading pattern.
Currency markets are highly fickle and news based. Forget the purchasing power parity theory that stipulates that the currency with higher interest rate will appreciate and the currency with lower interest rate will depreciate. In the long run that means a couple of years this might hold true but in the short run currency markets don’t care about the interest rates that much and do what they want to do. Currency pairs pay more attention to what the central banks do and what the politicians in the government do. So when you are trading these exotic pairs you should have good knowledge of what are the drivers of the economy of that country. Watch this video on how to trade with Fibonacci Patterns.
For example all pairs that involve USD either as base or counter base, should watch Federal Reserve. Every month there is FOMC Meeting. FOMC stands for Federal Open Market Committee. FOMC Meeting decides each month whether to keep the interest rate same or change it. Of course the decision is taken beforehand but it is announced after FOMC Meeting. FOMC Meeting also decides whether to increase money supply in the market or tighten the money supply. So this is an important meeting. You should watch it. Read this post on what happened when FOMC Meeting increased interest rates.This interest rate increase also affected USDZAR.
The only problem with exotic pairs is that they have a big spread as compared to highly liquid pairs like EURUSD, GBPUSD, USDJPY, USDCAD, AUDUSD, NZDUSD etc. For example FXCM is charging 50 pips, AvaTrade around 78 pips, FXPRO is charging around 100 pips while Oanda is charging around 450 pips. Price of pip will also be different from that of major pairs. So if you want to trade South African Rand, you should first check with the broker the spread that is being charged. The spread is variable. When the market becomes volatile, brokers widen the spread conveniently. So before you enter into a trade, it is a good idea to check the spread. Avoid opening a trade when the broker has widened the spread. You should have a spread indicator installed on the chart that tells you the spread at each tick.NFP is another important news release for USD pairs. Read this post on how to trade NFP Report.
How do you overcome the problem of a big spread? The easy solution is to use a pending limit order. This will help you avoid entering the market at the wrong time. Of course you have to include the spread when you are placing the pending limit order. Exotic pairs are a bit different than the major currency pairs that are tightly controlled by their central banks. Exotic pairs sometimes start sliding in one direction and continue to do so. This is what we call a trend. So unlike a major pair when an exotic pair starts trending it can continue for many months. Of course there are market fundamentals that drive the trend. Read this post on how to trade trends naked.
I use candlestick patterns a lot in my trading. I like to trade naked. You can see in the above screenshot, a bullish pinbar. This is the signal that market has changed direction. However, I would avoid entering the market with this pinbar. I always look for a small risk entry. First I let the market change direction. Once I get confirmation that market has changed direction I look for a low risk entry. Did you read the post on this long legged doji pattern?
You might be wondering why the traditional technical indicators like MACD, RSI, CCI etc don’t work anymore. Days of traditional technical analysis is coming to an end. More and more hedge funds and big banks are using algorithmic trading strategies that incorporate machine learning and artificial intelligence. This is the time, you should also start learning quantitative trading fundamentals. I have developed this course on Algorithmic Trading System Design. In this course I teach you how you are going to design algorithmic trading system. Now when it comes to algorithmic trading, you should learn how to simulate your algorithmic trading strategy using Markov Chain Monte Carlo Methods. I have this course on Markov Chain Monte Carlo Methods for Traders that teaches you how to do it.