How to trade USDZAR – As with many of the currency pairs traded by private traders within our online trading community, the South African Rand versus the US Dollar (USD-ZAR) is no exception.
Our universal trading style allows us to trade price action according to the story it tells irrespective of what the currency pair might be. Regardless of whether we trade forex chart patterns on the daily or weekly chart, we look for the same clues.
In this article: How to Trade USDZAR, we will share with you the exact steps we took using our forex trading plan. After reading this trading article, you will also see how we were able to analyse this currency pair to pinpoint a trading opportunity with positive reward:risk.
You will also learn the rules of successful trading strategy: exactly when to enter the market, how to manage the trade, and when to exit the market.
Our long-term market analysis of USD:ZAR (from Nov 2011 to Sept 2017) concluded the obvious; the US Dollar was in a strong up-trend, which, from Jan 2016 to Sept 2017, was in a period of retracement. After all, no market goes up or down in a straight line without traders looking to take profit along the way and causing the inevitable correction or retracement. However, retracements bring opportunity for trend traders. A simple forex trend trading strategy is to simply buy the dip in an up-trend in anticipation of a continuation of the prevailing up-trend. Conversely, in a down-trend a trend trader could be to simply sell the rally.
As our bias was still “long”, it made sense to identify an efficient entry where we could buy the US Dollar V the South African Rand in anticipation of a trend continuation to the upside. The million dollar question was; when could we trade it and where?
Thanks to the application of the Fibonacci retracement tool, we could see that since March 2013, the US Dollar had experienced a 50% retracement in the value of its gains made against the ZAR from the start of its aggressive bull market which started in December 2011 (when $1 USD equalled 6.6 South African Rands), to the highs of Jan 2016 (Where 1 USD Dollar equalled 17.74 Rand), to April 2017. Ever since finding support at the 50% Fibonacci retracement level (12.33), price had made higher lows. This gave us an obvious clue that buyers were coming back into the market. Conversely, price action was also making lower highs and funnelling into a triangular formation – a valid chart pattern.
Triangles are continuation patterns and, granted we were in a long-term up-trend, this gave us a good potential entry for a long-term buy position with good profit potential. With regard to trading triangles, technical traders can typically trade either the breakout of the triangle or the bounce of price within it.
Since March 2017, we could see from our technical analysis that price had given us two lower highs and two higher lows. Furthermore, the range of this triangle afforded us good profit potential if we had the opportunity to trade inside the triangle. In September 2017, the weekly bar (4th September) closed as a bullish pin-bar reversal rejecting the level of support. It also represented the second higher low within the triangle. This represented a decent buy signal, where we were able to buy the US Dollar against the South African Rand in anticipation of its resumption to the upside. What is more, this bullish pin bar was also located 25% away from the apex of the triangle which is the point where triangles typically break-out.
By trading this trade set-up, we could profit from the distance between our entry and the top of the triangle (our first take profit level) and also align ourselves in a long-term buy trade before a potential breakout to the upside.
We placed our buy entry at the high of the bullish pin bar reversal on our live trading account, with our protective stop-loss below the low. Markets can go up and down so to safeguard against the unexpected is a good habit for trading. As this trade was identified on the weekly timeframe, we would leave our orders for the proceeding week before managing it according to how the market moved and whether our trade triggered or not.
Having placed our trade with our best broker, our buy orders were quickly triggered as the USD gained in strength against the Rand over the days which followed. This resumed into the next week and the second week of being in the USDZAR buy trade closed as a bearish pin bar reversal, after rejecting the topside of the triangle. This spelled danger as it this trend line resistance had proven itself to be a clear obstacle, which prevented price from breaking out.
As nothing is ever guaranteed when it comes to financial markets trading (no matter how valid or flawless the argument may appear to be!), we needed to observe the rules of our forex trading strategy, and deploy trade management. This ensured we would avoid a severe drawdown while simultaneously locking in profit, as well as reducing downside risk. As the close of the aforementioned bearish pin bar posed a threat to our trading profits in addition to potential upside gains, we moved our protective stop-loss to the low of the second week. If our stop-loss was triggered in the week thereafter, it would mean we could bank the profits we had made while eject ourselves from a forex trade, which had invalidated itself.
Fortunately, this newly adjusted stop-loss was never reached and the third week resumed with the bulls dominating the bears, sending price in an upward continuation. The end of the third week closed above the trend line resistance (above the triangle), which was a positive sign for the longevity of this long-term buy position. Week four, closed as a buyer bar thereafter. As we had our second opportunity to move our protective stop-loss (below the low of week four) as per the rules of our trend strategy, we did. An aggressive sell-off in week five, however, stopped us out of the position fully.
However, we were able to exit with a 4% gain on our trading account (risking 2% of our capital). A pretty good outcome considering the trade set-up took us minutes to identify and the trade, even less time to place and manage! That’s the power of set-and-forget trading.
So, now you know how to trade USDZAR as a forex reversal. As you continue to follow us, it will not take you long to discover that we would trade a set-up on USDZAR no differently than if we saw the equivalent trade opportunity on Gold, AUDCAD, Oil or any equity! Yes, our universal trading strategies can be applied to all asset classes.
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