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How to trade the USD/ZAR part 2: swing trading & position sizing

In this article we look at two further strategies for trading the USD/ZAR currency pair, namely swing trading and position sizing.

In our previous 'how to trade the USD/ZAR article', we looked at hedging risk with the USD/ZAR as well as a day trading and news trading ideas. In this article we look at two further strategies for trading the USD/ZAR currency pair, namely swing trading and position sizing.

What is swing trading?

The concept of ‘swing trading’ falls somewhere between trend following and day trading strategies. A swing trader may consider holding his USD/ZAR position overnight or for at least a longer period than a day trader or scalper would, while not holding onto that position for quite as long as a trend follower might.

Swing trading is essentially looking to capture a portion of the longer-term trend. It is understood that markets don’t generally move up or down in a straight line and that in an uptrend you may have small dips in the market (against the uptrend) and in a downtrend you may have small rallies (against the downtrend).

Swing traders are essentially looking to ‘Buy the Dips’ in an uptrend and ‘Sell the rallies’ in a downtrend.

Why swing trade the USD/ZAR?

As the USD/ZAR is an exotic currency pair, the spread (difference between the bid and offer) will be wider than that of more liquid currency pairs, such as that of the majors (major currencies crossed with the USD).

The slightly wider spread creates a higher cost barrier for shorter-term strategies (i.e. day trading/scalping) than one would find in trading for scalping the majors. However, the larger swings in price movements of the exotic currency pair create broader movements and trends which are more conducive to a swing trading approach.

Creating a swing trading strategy for the USD/ZAR using technical indicators

As alluded to earlier, a swing trader is concerned with the trend, so formulating a strategy for the USD/ZAR with this methodology would require identifying the trend first.

There are several technical indicators which can help you with identifying the USD/ZAR trend, such as:

  • Moving Averages
  • MACD
  • Parabolic SAR
  • Average Directional Movement Index

Once the longer-term trend has been identified using one of these (or other) technical analysis indicators, a swing trader may look to a momentum type indictor to help identify shorter-term entry and exit signals in line with the trend identified.

Some of the more popular momentum indicators are as follows:

  • Stochastic
  • RSI
  • Momentum
  • Price Rate of Change

Using this premise for swing trading, a strategy consideration for trading the USD/ZAR might be to use a moving average to identify the longer-term trend and then the RSI indicator to trigger signals in line with this trend.

For example, if the price is firmly above the moving average, the trend would be considered up and one might consider using oversold signals with the RSI to buy the USD/ZAR, while using an overbought signal to exit their position.

For short positions, If the price is firmly below the moving average the trend would be considered down and one might consider using overbought signals with the RSI to short sell the USD/ZAR, while using an oversold signal to exit their position.

Managing your risk and controlling your position size

While many traders are primarily concerned with when to buy and sell in trading, of at least equal importance, is controlling your risk. This can be done by managing the number of contracts you trade relative to where you have placed your stop loss.

When trading the USD/ZAR with IG, traders will need to decide whether to trade standard or mini contracts.

Standard contract: A standard contract would mean that each point or pip movement would be worth R10.

Mini contract: A mini contract would mean that each point or pip movement would be worth R1.

One point/pip is considered four decimal points to the right (0.0001). For example, if the USD/ZAR was trading at R14.5001/$ and then moved to R14.5002/$, the market would have moved 1 pip, the equivalent of R10 or R1, depending on whether it was a standard or mini contract traded.

If the contract opened says ‘USD/ZAR’, it is a standard contract being traded. If the contract opened says ‘USD/ZAR mini’, it is the mini contract being traded.

Managing your trade size and in turn risk can be done with the following formula:

Number of contracts = Total Risk / value per point (pip) x stop distance

Here is the explanation:

Total risk = How much of your capital you are prepared to risk in one trade (you decide)

Value per point = Pip value per standard or mini contract chosen

Stop Distance = The distance (in pips) of your exit point (should the market move unfavorably against you) relative to your entry point

Trading example

If you are prepared to risk R2000 in a trade, you are trading in mini contracts (R1 per pip) and your stop loss is 250 pips away from your entry your trade size would be calculated as follows:

Number of contracts = Total Risk / Value per point x stop distance

Therefore

Number of contracts = R2000 / (R1 x 250)

= 2000 / 250

= 8 contracts

In Summary

  • Swing trading looks to capture portions of a longer-term trends
  • For swing trading the USD/ZAR, traders might consider using an indicator to help identify trend as well as an indicator to identify momentum triggers for entries and exits
  • The USD/ZAR can be traded as a standard or mini contract with IG
  • The following formula can help with position sizing: Number of contracts = Total Risk / value per point (pip) x stop distance

Publication date : 2019-05-07T09:56:45+0100

This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. Any research provided should be considered as promotional and was prepared in accordance with CFTC 1.71 and designed to promote the independence of investment research. See our Summary Conflicts Policy, available on our website.

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