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ZAR She Goes!

ZAR She Goes!

DailyFX, Research

Previously, we wrote about if the USD were to gain strength, that matching it up against a relatively weak currency would be the trading opportunity (“Dollar Doom?”). Here is a chart of the largest losers against the US Dollar this week. If the trend continues to favor the US Dollar strength, look to the largest percentages below to continue to be a weak currency to a trade against the US Dollar.

Exotic% LossMajor% Loss

(Percentage loss against the US Dollar for the week of May 9, 2011)

In the above chart, the percentages represent the percentage loss of the named currency versus the US Dollar. So when you see EUR at 1.70%, that means the EUR lost 1.7% of its value against the US Dollar.

Likewise, you can see the ZAR was the largest loser in the chart. This means the USDZAR pair gained 4.98% and was the largest mover of the USD pairs. If you missed the trade entry outlined with the USDZAR on Tuesday (“Follow the Leader”), another opportunity may present itself in the next couple of days.

Here is a daily chart of the USDZAR. Today, prices broke through a downward sloping resistance line from February 2011. What was resistance may act like new support in the future. Therefore, look for the 6.9300 to 6.9600 price zone to offer support if this recent up move fades.

The Trading Opportunity

Place an entry order to go long in the 6.9300 – 6.9600 green box. Place a stop just below the recent swing low near 6.8500. We will target 7.1900 for at least a 1 : 2 risk to reward ratio. Since the move is 3% of the price, look to move your stop to break even when the price moves halfway to your target.

Trading an Exotic Pair

The USDZAR is an exotic currency pair. Typically, you will see spreads widen out during the Asian and London sessions to near 80 pips. A typical spread is near 45 pips, but with a pip cost of $0.15 on a 10k position, your transaction costs are less than $7. The risk on the trade is :

1,100 pips X 0.15 (pip cost) = $165 for each 10k position

Since this is an exotic pair, the margin is more than you would find on a more liquid cross or major pair. However, it is not uncommon to see this pair move several hundred pips on a given day which is why higher margin is required.

Happy Trading!

Jeremy Wagner contributes to the Instructor Trading Tips articles.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.