Last week 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, and 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 that post, please do so now before reading this post) –
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!
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 now, while knowing the Rand's long term trend is essential, it is not sufficient in order 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 post
In any such market as the Rand, there is not only a primary trend (likened to the tide), but there is a secondary (or intermediary) trend, which can be likened to the waves of the ocean.
As shown in the below Chart of the Dollar/Rand since 2011, these secondary trends (shown in black) are superimposed on the primary trend of a market (shown in red)
Click to see full size...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, and 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 the signs of what weather conditions make up good surfable waves, and in more recent years forecasting this has become more accurate due to using sophisticated weather pattern-analyzing 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, and 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 then head out on the back current to wait for the next wave in.
And with the Rand and other 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 system that uses past market patterns to forecast 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 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.
As an importer or exporter:
- If the underlying trend is in your favour, your strategy would be the same as the trader, except when your time to exchange has run out.
- 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 lacklustre ride that is 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 had 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 of 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 be 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.
...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!
Did you enjoy this analogy? Find it useful? What are your thoughts and comments? I would love to hear them.
To your success~
James Paynter
P.S. Knowing the Rand's long term trend is essential (see Part I), but not sufficient to be successful – you also need to know what the intermediate trend is doing and how this relates to the long term trend. And then likely a bit more than that too – watch out for next week's instalment.
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4 replies to "Respect the Tide, Ride the Wave, Watch the Ripples - Part 2"
The budget was much as expected - an exercise in obfuscation based on fairy tale GDP numbers. The Rand went as I expected too - an initial good move when the 4.9% shortage was announced, and then a run when the small print was looked at.
We will have to wait and see if the current rate increase on the US 10-year continues, or if it goes below 2% again in which case we may benefit from idiots who want to buy our tempting 8% (and later 9%) junk bonds. If bonds go up significantly, we can get a big run on the Rand this year and more $ up that will be bad for the whole world. Shares already look like a top is near.
Right now the oil price is higher than it should be too (I expect it to go lower again), so the `oil gift' is not matching the losses on other raw materials, but it has delayed the crunch for perhaps a year. The balance of trade is worse than projected and gold is still the best Rand hedge - especially if one also trades the waves with CFD's!
Some shockers came out too - like Medupi was supposed to be R7b (2007) and now R110b so far and another 5 years to go - to R200b? Another trillion in loans for R830b infrastructure in the next 3 years? Note we are paying 14% interest (R126.44b) on past loans (R1.768t) already, and going up as the Rand goes down. And that is only central government.
Durban already has R2m a day in interest on the R12b Soccer cup, and now want to double that to host the Commonwealth Games. The mind boggles, but we can be sure the pit will get deeper and what is at the bottom is not very nice. I see a bad bad 2016 with downgrades. David
Hi David, thanks for you feedback - always interesting to get your perspective.
Agree the future does not look great, the greatest concern being the lack of concern with the massively increasing debt!
James
Curious to know causes of 'lesser' secondry peaks since about April last year- will theycontinue thus or resume their greater volatility?
Fred, whatever the trigger, the cause of any peaks is a change in short-medium term sentiment. I don't get caught up with any triggers, but look at the patterns themselves. As humans we make emotional decisions, and this is what the Rand reflects - these fluctuations of human emotion from one extreme to the other in different degrees. We are working up to a larger-degree peak, so expect more volatility in the coming months - in fact, as I respond here, the Rand has jumped over R12 per Dollar!
James