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Timing your forex trades to beat currency volatility

19 January 2022 Bianca Botes, Director at Foreign Exchange Experts, Citadel Global
Bianca Botes, Director at Citadel Global

Bianca Botes, Director at Citadel Global

Around the clock currency trading has boomed in popularity around the world, and it can be very profitable when done right, but local individuals and businesses need to be cautious about how they time and execute their foreign exchange (forex) trades due to the volatility of the rand.

Bianca Botes, Director at Citadel Global, the foreign exchange and treasury experts, has some expert advice to share with importers, exporters and traders on how to time their forex trades and look out for pitfalls, so that they can make more money and protect their hard-earned cash.

Factors that determine the timing of a foreign transaction include payment terms, cash flow and market conditions. However, often, it becomes a subjective decision based on one’s emotions, prevailing market sentiment and the limited information one has access to. The good news is that there are some tools and tricks that importers and exporters can use to avoid falling into the subjectivity trap.

TOOLS TO AVOID MAKING AN EMOTIONALLY SUBJECTIVE DECISION

1. FUNDAMENTAL FACTORS
These include considerations of aspects ranging from economic factors in both countries where the currency is being bought and sold, to utterances by politicians and market sentiment. By keeping an eye on these fundamentals, importers and exporters will have a better understanding of the underlying trends and directions that currency movements can be expected to take.

2. TECHNICAL LEVELS
Often referred to as “support and resistance levels”, these are calculated based on historical market data, and involves studying historical forex movements and patterns to determine potential future moves. The signals that technical analyses provide would indicate when to buy and sell a currency based on the move and the strength of that move. This can also give rise to algorithmic trading whereby a formula will be used to determine when to buy and sell forex, based on a set of rules and conditions in the market, such as time, price, volume and so on.

3. HAVING A RISK POLICY
By setting out clear rules regarding the management of risk, one can ensure that a trade remains an objective transactional event, instead of an emotionally subjective decision.
Obviously, with international transactions, currency risk comes to the fore and none more so than with the rand. SA boasts a highly liquid but small forex market, making the rand a decidedly volatile currency, which can bring certain hazards for those needing to deal in forex.

These risks can be mitigated through proper management. For example, you could define the size of the trades upfront, and decide if you are going to hedge your exposure and how, such as through currency futures or forwards.

Combining the above three elements can often be a hard ask for a financial director, a Chief Financial Officer or a financial manager of a business as it is normally not their core function – most would rather prefer to manage the overall financial health of the business.

MONITORING POTENTIAL PITFALLS

Assuming that the timing of the forex trade has been decided, the next thing you need to manage is the execution, which can hold unexpected pitfalls. You will need to keep an eye on:

1. LIQUIDITY
Thin or low liquidity can often result in liquidity premiums driving up exchange rates and cutting into the profits of the business. This poor liquidity can be a by-product of inopportune market timing. The optimal times to trade are when the markets are busiest and the buy and sell spreads are at their narrowest.

It is at these times when market-makers are less active (there is less profit available to them), leaving more room for importers and exporters to effect genuine deals. In general, this means that during normal business hours, better rates will be available, although currency can be traded around the clock if needed.

2. MARGIN
The mark-up charged by forex traders can often result in inflated forex costs for businesses. This means it pays to shop around and seek out a trader who will function in your best interests.

3. PRODUCTS:
Failing to select the optimal product to transact – such as spot, forwards, or derivatives – can also have negative implications for an organisation, so be sure to choose the best products to suit your requirements.

Both timing and execution can easily become treacherous terrain for importers and exporters. The foreign exchange market is not only volatile, but also tends to lack transparency when it comes to fees, costs, and alternative options available. It is critical to have a trusted professional partner with a proven track record for forex deals who can ensure the crucial mix of competitive pricing and execution efficiency in this volatile forex environment.

Managing your forex efficiently can lead to reduced costs, increased profitability, and overall improved business efficiency. This can make all the difference to the success and survival of our local import and export businesses in these times of uncertainty.

Quick Polls

QUESTION

There are countless articles written about South Africa’s poor retirement outcomes. Which of the following would you single out as the biggest contributor to local savers not accumulating enough to buy an adequate and sustainable pension?

ANSWER

Lack of personal accountability
Poor participation in formal retirement funds
Reluctance to seek financial advice early on
SA’s high unemployment rate
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