USD/ZAR Trading Tutorial

This currency pair is the US Dollar and South African Rand. It is a popular trading product for traders in many parts of the world, but it is mainly popular in Africa. There are several reasons that people trade this pair, but there are two main ones that I’d like to mention here.

The first being that the US has no capital gains tax. This means that if you are an American and you make money from trading this currency. Then you will not have to pay any extra taxes on your profits.

In addition, if you live outside of the USA then your country will require you to pay taxes on any dividends or interest from investments. So USD/ZAR is a pair of currencies that is very tax-efficient to trade.

I’m going to show you a few ways you can approach trading the USD/ZAR. Both on its own and as part of the forex strategy we call “4-hour range breakouts “.

How To Trade USD/ZAR?

First of all, you should go to your Meta Trader platform. Under Navigator -> Create Chart, we want to create a chart that is set at 15 Minutes.

Now we need some Data Feeds. For this example, we’re going to use the Data Feed: Yahoo Finance: Rand-Dollar (the symbol name is ZAR USD).

Now you’re probably wondering what is this data feed? This data feed is information regarding the US Dollar and South African Rand currency pair. This graph updates every 15 minutes. It shows the latest available price for the market. If you are looking to enter or exit a position, then look no further than this graph. We’ll get into some more specific examples of how to use this in a minute.

The first step we want to take is that we go into Navigator -> Indicators or press Ctrl+I. 

And here I’m going to place an ” Exponential Moving Average “. But notice that there are three different types of EMAs right here. Do not worry about these. They’re all good for different trading strategies – all you need to know is that I am going to use the first one called EMA.

I’m going to put this on my chart by pressing “Insert Indicator” or Ctrl+I. 

And also turn off the default setting of “Show Lines”, as we do not need these here.

Back-Testing

Now, a good practice after using any indicator is to back-test it. For those of you who don’t know what this means. Let me just briefly say that back-testing is a way to see how your trading strategy would have done in the past.

So for example, if I wanted to back-test this strategy from let’s say, 1st of January 2016 to the 31st December 2016. Then I would get the data for every single day in this period and run the strategy on it. This is extremely computationally expensive. So what we can do instead is use a back-testing platform, which does all the heavy lifting for us.

You will need to understand the trading indicators to make your trading strategies. So let me just briefly explain how to read this indicator. So basically, when the black line goes above the red line, that means that there was a price increase.

If they cross each other, then that means that they have gone down together. If one goes up while the other stays flat or goes down. Then that means that there is some resistance/support which prevents the price from going any further.

These are all very basic trading strategies. Now I won’t go into super detail with them as I’m more interested in showing you how to trade USD/ZAR.

Data-Feeds

Now, remember those data feeds we needed? Well, we’re going to apply this indicator to that Yahoo Finance: Rand-Dollar (or ZAR USD) feed and see what happens. If you’ve got your MT4 platform open. 

Then you should already have that data feed there. However, if not, then just go over to Navigator -> Data Feeds or press Ctrl+F7. And apply it to the chart by pressing “Insert Data Feed” or Ctrl+F8.

As you can see, it updates every 15 minutes (because that’s where we set our data feed). And it also has a red line at 0. The red line is just an indicator that says where the price was when our EMA was last updated.

We don’t want the red line displayed. If you want to turn it off then go into Navigator -> Chart Objects -> Indicators or press F9. And scroll down until you find ” Exponential Moving Average “, select it.

Now, one really important thing you need to know is that. Even though we’ve allowed the platform to automatically download the most recent data from the Yahoo Finance site. It doesn’t automatically apply that data to the chart. For that EMA line to update, then I need to press “Append” or simply Ctrl+A, and there’s a reason why we have to do this…

You see, our EMA line is going to be lagging the price of USD/ZAR by a few minutes. Because it takes some time for each new Yahoo Finance data feed update to come in. If you don’t append the new data, then your indicator will just keep updating with old information.

So remember – for this strategy at least – whenever you want your 15-minute chart to update. Then go into Navigator -> Chart Objects -> Indicators. And then select “Exponential Moving Average” and then press “Append”.

So what I’m going to do now is try to find some information about the current state of USD/ZAR using my 15 minute EMA line. The red dotted lines represent important support/resistance levels. Which will be useful for shorting (selling) the currency pair. Whereas the green dotted lines are good resistance/support levels for buying.

USD/ZAR Trading Strategies

  1. The Price Action Strategy

The price action strategy can be a bit complicated sometimes. I’ve added a detailed explanation of it down below, so here’s how it goes:

STEP ONE: Find a good resistance/support level using the EMA line, as shown above.

STEP TWO: Now check if there is a candlestick that forms at that resistance/support level. This indicates potential price action reversal patterns, such as a pin bar or a Doji. And since we want to keep it simple, let’s just go with a pin bar.

STEP THREE: If you spot a pin bar, then make sure its wick points toward the current trend (the black arrows). If not… well, it doesn’t matter much, as long as your rules are skillfully defined.

How To Use It?

Now what I’m going to do next, is tell you exactly how I use this info to trade USD/ZAR in my day trading.

STEP ONE: Using the EMA line, find a good resistance/support level. And make sure there isn’t a pin bar at it yet (the process explained above).

STEP TWO: If we got lucky and found a valid support level with no pin bar reversal pattern formed. Then get ready to BUY once the candlestick falls below that support level.

The ‘Pin Bar Secret’ Comes Into Play Now…

Now I’m sure you’re thinking; “If this is such a great strategy, why doesn’t everyone use it?”. 

Well, it’s because even if the price continues to move in our favor after breaking out of support or resistance.

Sometimes some traders might get shaken out of the trade. To avoid this from happening, we’re going to use a special trick that’s called “The Pin bar secret”.

STEP THREE: Now, if there was a sell-off right before the candlestick made its move toward the target… So simply put, you want to buy as close as possible to where that black line is touching price action, and this is how I do it:

This is a simplified example. But if you follow these rules precisely, then you can make a lot of pips using this strategy!

Simulate A Trade With The Strategy Above!

If you would like to see exactly how I plan my exit strategy for USD/ZAR. Then simulate a trade with my strategy above using the platform of your choice.

IMPORTANT: Please make sure to test this strategy on a demo account first to see if you understand it!

Final Verdict On The Pin Bar Strategy

This is a good strategy. When you see the market moving up and down and you find that it’s at a good resistance or support level. You should put your money there. It’s very easy because of how choppy South African Rand is.

But surprisingly enough, I’ve been able to use it quite a few times recently. It makes sense though since USD/ZAR has been in a tight range.

  1. The Hedging Approach

Some traders might prefer to hedge their currency exposure for an asset purchase or funds received in USD. This allows them to lock in the current exchange rate and helps to avoid currency fluctuations.

The hedging process is fairly simple. Since you are just locking in a set price now instead of waiting out for further gains.

How To Use It?

Hedging is a smart choice for traders who are interested in limiting their risk exposure. People who are afraid to lose their initial investment typically used it.

So let’s take a look at the steps below:

  • Choose the currency pair that you’ll trade.
  • Determine where you’re going.
  • Determine the size. (If you’re not familiar with forex risk management, then don’t worry about this)
  • Enter trade
  • Exit trade (sell-off)

RoboForex has made things simple by allowing you to enter all your trades on one single platform. Which means they do all your hedging for you!

So what you need to do is just select the “hedge” button on the top side menu. And then all your future trades will automatically be hedged.

And if you want even more simplicity. They offer a service called Auto Hedging. So not only can they hedge for you, but they’ll also show you exactly when to enter and exit the trade.

This means that selecting one of their advanced strategies will hedge ALL your open trades at once.

IMPORTANT: Please make sure to test this strategy on a demo account first to see if it’s right for you!

Hedging Risk Management

There is a risk management strategy that lets you determine the direction of your trade. Since, as you know by now, this strategy will profit from both upward and downward movement in USD/ZAR.

Your first step should be to calculate the max amount that you’re willing to lose. This means considering how far USD/ZAR can go either up or down before hitting resistance or support levels, respectively.

So let’s say, for instance, if we were going short on this pair… How much capital would I be willing to lose? Well, since my stop loss level was at X amount. Then it doesn’t make sense to risk more than what I’m willing to lose because there is no point! So why bother taking on such unnecessary risk?

Thus, you should never risk more than 2% of your account balance on any one trade. And this is why I recommend that if you’re new to currencies and haven’t done much research on the financial markets yet. 

Then it is best not to experiment with it alone. Instead, seek some professional help (I highly recommend RoboForex). That way, you’ll avoid making costly mistakes and save yourself your entire fortune in the process.

  1. Trend Trading Strategy

Successful trend trading can be defined by having an accurate system to first determine and then follow trends. But, it’s crucial to stay alert and adaptable, as the trend can change direction at any time without warning.

A strategy that attempts to profit from a pre-determined market trend will be called ‘trend following’ or ‘trend trading’.

Trend traders do not have a fixed view of where the market should go or in which direction.

They only enter trades in the direction of the predetermined trend. And if they are correct on the market direction, they will make money over time. If you use technical analysis to predict the direction of the market. Then you will only buy if that trend is going in that direction.

Why Choose This?

Trends are important for traders because they reduce market uncertainty and risk-taking. Markets often spend 80% or more of their time on trends. Moving in one direction with varying degrees of strength.

If we understand what makes a strong and weak trend we can be prepared to trade accordingly. Traders who learn how to use this trend will be able to enter into positions that will make them more money and limit their risk.

What Influences The USD/ZAR Exchange Rate Value?

The value of any currency is a complicated mixture of the value people put on it. It depends on a country’s growth, how much inflation there is, and what interest rates are. 

This means that besides the common factors that can affect the value of a currency. There are also small things and unique characteristics about the country. That will be responsible for fluctuations in the currency value. 

It is important to note that not only do fluctuations in exchange rates impact currencies but also commodities such as gold and oil. Since they are popularly traded using the dollar. Exchange rate fluctuations for these commodities cause supply changes. Which then results in price changes.

Taken into consideration this information what follows is a list of only the prominent factors which influence the value of USD/ZAR:

FRS & SARB Monetary Policies

The Federal Reserve System (FRS) & South African Reserve Bank (SARB) control the supply of money in the market, to keep the economy on track. A dovish policy from either of the central banks weakens the related currency. In contrast, a hawkish monetary policy strengthens the currency.

Other Central Bank Policy

Some countries have other central bankers who influence interest rates and inflation levels. For example, Mexico’s Banco de México and Colombia’s Banco de la República.

This ultimately affects a U.S. investor’s decision to trade USD/MXN or USD/COP. For example, given that these pairings commonly track movements in both currencies.

Fiscal & Economic Policies

The United States’ fiscal policies affect whether foreign investors will trade in dollars or euros. For example, in the US, the president wants to make extensive changes to the infrastructure. 

If this bill gets passed through congress, US spending will increase. This might cause inflation rates and interest rates to go up. This, in turn, will attract foreign investment and make the US Dollar more valuable.

As for South Africa, there are concerns over state-owned enterprises’ debt levels. This implies a further tightening of fiscal policy to reduce this debt burden on South African taxpayers. 

Given current electricity challenges and widespread blackouts across the country. Investors will most likely shy away from taking any major economic risks until such issues can be resolved.

Trade

The United States has a significant trade deficit which could affect the USD/ZAR rate valuation. This is because the U.S. dollar strengthens against its trading partners’ currencies.

This can result in an increase in exports and a decrease in imports. Creating more jobs increases inflation, which pushes up interest rates. This means that growth is good for the economy, and attracts foreign investment.

The US buys more from South Africa than it sells. In the past year, there was $4 billion worth of goods that were imported to South Africa. And only $2 billion worth exported from September 2016–August 2017. Source: Foreign Trade Statistics, SAPS.

Political & Economic Stability

Economically safe countries attract international investors and strengthen their currency. This will directly impact the value of USD/ZAR and South Africa’s economic outlook. Which is not that great.

Investors are worried about the public debt, corruption in politics, and low GDP growth. Low GDP growth has been going on since 2011/2012. South Africa’s currency, the Rand, has also weakened significantly since 2012 against the US dollar. Thus, making it more expensive for international investors to trade with SA.

Public Debt

The U.S.’s total debt will harm the value of its currency. Compared to countries with smaller debts or even fewer debts that are considered economically strong.

Countries such as Germany, New Zealand, Australia & Switzerland. All have relatively small government deficits compared to their national economic sizes. This means that people will prefer trading USD/ZAR and USD/EUR.

For example, these economies are considered to be more economically sound. This means that investors will choose South Africa as a viable economic partner over the US. Thus increasing the value of Rands.

How Economic Events Can Affect Currency Trading

The ever-changing economy is the basis for currency speculation. A country’s economy can affect the value of its currency. 

If the country has a strong economy, then its money will be worth more. If it has a weak economy, then its money will be worth, less.

Events that affect economic growth can also influence stock prices and other commodities. Which, in turn, affects the exchange rate between two currencies. Many factors can affect an economy as large as that of China or India, but certain factors are common to all countries.

When there are political events, like wars or civil unrest, the country’s currency may get devalued. Because of war, the economy gets worse. Fighting destroys things, we lose resources, and people lose jobs. 

Other political issues that affect the economy are when one country imposes tariffs on another, or if they put an embargo on them. Sometimes they also put sanctions on a country.

A central bank can also devalue its currency by printing more money than the GDP of the country. Thereby, the value of the currency will go down against another fiat currency. Or commodity-based currency like gold or silver. Devaluation is often used as a last resort to jumpstart their flagging economies after other options have failed.

The Catalan crisis caused investors to be scared of Spanish assets. Because they thought this would cause social unrest which could harm the economy even more.

The upcoming elections in Germany will cause economic volatility in the region. They could even cause problems if an anti-EU party gains power. Political instability has affected many over time due to war, famine, and other disasters that occur because of these events.

Inflation or deflation can also affect the exchange rate between currencies because it affects the GDP. Countries with high levels of inflation often have a lower standard of living due to higher costs for goods and services. Which makes their currency worthless within other countries.

Inflation has been an ongoing problem in many emerging economies, such as India. But is beginning to show signs of slowing down even though oil prices continue to rise.

Many people think that deflation is the opposite of inflation. It’s not. Deflation is when prices drop because there’s no growth or business activity. This will affect other things like GDP, which measures how much money a country has.

Deflation is more problematic than inflation. That’s because when there is deflation, businesses will reduce how much they produce. And that can lead to higher unemployment rates and social unrest.

Political stability, low inflation rates, and economic growth are all factors that positively affect an economy. Investors flock to these countries in search of profit. Which increases the demand for the local currency, leading to its appreciation. 

With many countries in turmoil, many investors turn to places that they know will not be as chaotic. These countries have strong fundamentals. And can withstand anything that might come their way.

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