The South African Rand (ZAR) is one of the most volatile emerging market currencies. Combined with extensive international hedge fund carry trade participants and the uncertain nature of the political landscape, you have a perfect currency to trade Binary Options with.
The South African rand is also the most liquid currency in Africa. This implies that nearly all Binary Options Brokers will provide the opportunity to trade it. The most common pair available to trade ZAR is the USDZAR cross. The following analysis will take a look at this.
Before you can begin trading the South Africa Rand, you need choose the best Binary Options Broker. You would want to make certain that the broker meets all the requirements in terms of platform sophistication and legal protections.
There are also a number of different account options when you choose to sign up with a Broker. Depending on the amount that you choose to deposit, one is entitle to special privileges.
Binary Options Overviews
Before we can analyse how to trade the Rand with Binary Options, a quick summary of the fundamentals is required. Binary Options are investments that either pay off 100 of 0 (hence the term “binary”). Apart from that, they operate in exactly the same fashion as traditional options. They have an expiry time and a strike price. When an investor enters a Binary Option trade, he is taking a view on the direction of USDZAR.
The investor can either enter a CALL or a PUT option. If the investor enters a CALL option, he / she is hoping that USDZAR will increase. The opposite can be said for an investor that enters a PUT option. The reason that Binary Options are a chosen investment of many traders is because the gain and loss is known immediately at the outset of the trade. Another advantage of Binary Options is that the expiry time ranges anywhere from 60 seconds all the way to a few months. The investor can pick and choose the ideal expiry time for his investment horizon.
Using Fundamental Analysis to trade USDZAR
When one refers to “Fundamental” analysis when trading currencies, they imply the inherent Economic fundamentals of the country. These include factors such as Balance of Payments, Interest Rates, GDP and geo politics. From this perspective, an investor can trade important data releases and press conferences.
For example, an important indicator of potential monetary policy (and hence currency movements) is inflation. In South Africa, the two key inflation indicators are the CPI and PPI. The latter measures Producer inflation whereas the former measures consumer prices. The Binary Options Trader can enter a option based on his / her view on the impact of the inflation data on the Rand.
Let us assume that the market expects a CPI number of 6%. The Binary Options investor, on the other hand, thinks that inflation will be slightly higher than that. The investor can then enter a Binary Options call option on the grounds that the South African rand will appreciate as demand for the currency picks up from overseas money managers. Conversely, the investor could have entered a put option on the assumption that it would have gone the other way.
The analysis above could also be used for the release of a number of other important economic pieces of data. Another interesting fundamental trade that the investor could look at is announcements on the political scene. We are all aware of the dramatic impacts unilateral presidential action had on the Rand at the end of last year. Recently, a shrewd Binary Options investor could have used the recent rumours of potential charges against the Finance minister as an indication to enter a PUT option before the announcement last month.
Using Technical Analysis to Trade USDZAR
When investors use technical analysis, they are studying the previous patterns on the exchange rate and examining it for indicators. This is also called “Charting”. The assumption behind technical analysis is that previous prices will have an impact on future prices. Pure technical analysts don’t take a look at any fundamentals when choosing what trades to make.
Some of the most used important Technical indicators are trending indicators (such as moving averages) and momentum indicators such as the Relevant Strength Indicator (RSI). Generally, a series that is trending with strong RSI is more likely to continue its current path.
For example, if USDZAR moving average indicators are all trending upwards (ZAR depreciating) and the RSI is still high, then the investor will enter a CALL option on the assumption that the trend will continue and he / she will hence profit. Of course, the opposite view could be taken for the USDZAR trending in a downwards direction (ZAR appreciating) and the investor would enter a PUT option.
The investor could also look for possible changes in the trend. Reversals in the trend that correspond with falling momentum could indicate a turning point which should be traded by the investor.
At the end of the day, your choice of which methods to trade USDZAR comes down to your own preferences. The currency is also quite an idiosyncratic one which sometimes does not follow established norms. Hence, the possibility to craft a bespoke strategy based on a combination of both strategies exists. Indeed, some of the most successful Rand Binary Options trades use a combination.
As a new investor in the market, you could also make use of managed option accounts which are run by professional traders with established track records. They provide the perfect opportunity to learn from their success.