Foreign exchange (Forex or FX) trading is when you purchase and sell foreign currencies with aim to make profit. This Forex guide outlines the risk of this king of money making scheme. Before you place your money on the road, you need to understand how currency trading and market work. Conduct research and find a Forex trading professional who will give you financial advice. In this Forex South Africa guideline, we outline the following:
- What is forex trading?
- Risks of FX trading
- Dealing with foreign exchange brokers
- Is foreign exchange trading good for you?
- Forex trading apps, platforms, education, and courses
- Benefits of Currency Trading
- Currency Trading Definition
- How Forex Works
Best 2019 Forex Trading South Africa Sites
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What is Forex trading?
Forex trading is an act of buying and selling currencies with the aim of making profit off the changes in their value. You buy another currency using another. Forex is the most liquid financial market in the world with an average daily trading volume of more than $5.3 trillion.
Forex trading in South Africa is usually conducted through ‘margin trading’, in which a tiny low collateral deposit value a proportion of a complete trade’s worth, is needed to trade.
Forex Trading is complicated and risky. Even the foremost masterly and knowledgeable Forex Traders in South Africa have problem predicting movements in currencies. Trading in international currencies needs an enormous quantity of data, analysis and observance.
Risks of foreign exchange trading
Most foreign exchange products are extremely leveraged. This implies you simply need to pay a fraction (for example, 0.5%) of the worth of your trade up-front, however you’re still liable for the complete quantity of the trade.
Forex Trading Case Study: Michael $2 800 in an FX trade
Michael wanted to trade in Forex. He then deposited an amount of $3 500 USD with a margin FX broker. Michael decided to buy $100 000 US Dollars (USD) against South African Rand (ZAR) at 0.9100, that was a contract worth $ZAR 91 000. Michael a 0.5% margin of $USD 5000.
As Forex is not predictable, the value of USD against ZAR dropped to 0.8850 and Michael decided to close his position. He lost around $USD 2 825 ($USD 500 margin he paid included). From his initial amount of $USD 3 500, Michael was left with around $675 USD, less any transaction costs.
If Michael did not close his position in this trade and the value of the USD against the ZAR continued to drop, he was gonna meet a margin call and lose his initial investments.
But if Michael and his broker had arranged a guaranteed stop loss order, this was going to cost him a fee. The guaranteed stop loss order was going to close him out of the trade at a particular price to avoid losing further if the market moved against him. This would have not covered his losses, but capped them.
Foreign exchange trading is additionally terribly risky because:
- You might lose lots of money as currency fluctuations might move against you. Exchange rates are highly volatile and they have an inclination to manoeuvre around plenty even inside terribly short periods of your time.
- Markets open 6 days a week (due to time zones), 24 hours a day, thus you wish to devote plenty of your time to pursuit your investment
- Currency markets are very troublesome to predict as a result of such a large amount of factors have an effect on exchange rates
- Because most forex products are extremely leveraged, even little market movements will have a giant impact
- Risk management systems like stop loss orders, can solely offer you restricted protection by capping your losses. You will need to pay a premium worth to ensure your stop loss order
Forex trading raises the stakes more by rental you trade with borrowed cash (leverage), however you will be liable for all losses, which can exceed your initial investment. Margin forex trading is one in every of the riskiest investments you’ll create.
Dealing with forex brokers in South Africa
Below are risks that you may come across when dealing with forex trading brokers:
- You might war ‘counterparty’ risks – the chance that the FX broker will not be ready to fulfill its obligations to you if one thing goes wrong. For instance, if your broker became insolvent, you’ll be hierarchic as associate degree unsecured mortal and have problem obtaining your refund.
- You might not be ready to create trades once you need to, owing to an absence of liquidity within the market, execution risk, or alternative trading delays
- The broker might advertise low or perhaps zero fees and commissions, however there’s usually a margin of profit or ‘spread’ designed into the exchange rates you may trade at
- Promotional offers for ‘free’ and ‘no loss’ trades typically have strings connected. The offers might not be pretty much as good as they initially seem, therefore examine their terms and conditions closely before trading your cash
- Technological issues might hamper your ability to trade with success. For instance, there may well be issues along with your FX provider’s computing system or your computing system, or there may well be delays in data feeds
Do your own research
Different types of FX products involve totally different risks therefore you must browse and carefully read the product disclosure statement. Also make sure that the broker you are thinking of choosing is regulated by the FSB. The Financial Services Board (FSB) is one of the bodies set up by government to protect consumers when they buy long- or short– term insurance, forex or other investments in South Africa.
If the broker doesn’t have the FSB license, confirm it’s regulated by associate acceptable overseas authority (trading with these forex companies might not offer you recourse to South African laws).
To trade forex successfully, you will need information about how forex works, leverage, volatility and therefore the conditions of every country whose currency you’re trading.
You will additionally need to predict how these conditions will impact other currencies. This can be very tough as such a big amount of factors get play, as well as politics, political economy and market confidence, and these area unit sudden, random events.
You will additionally need to:
- To know in detail how forex trading works in South Africa
- Have voluminous time to try and do analysis and monitor your trades
- Understand forex trading platforms and apps used for FX trades
- Be ready to lose over the number you endowed
- Read the statement on the product disclosure and talk about the risks with your financial advisor
Forex trading apps, platforms, education, and courses
There also are several software programs accessible for trading forex in SA. Most FX brokers claim their programs let you know when to create trades. Bear in mind that nobody or program will ever accurately predict movements in foreign currencies.
Be cautious of brokers that say if you employ a selected product you’ll get access to higher exchange rates or straightforward cash. They’ll allow you to trial their trading platform for complimentary initially, however this can be typically simply a teaser for you to shop for the software program or platform.
A basic FX trading course or seminar won’t offer you enough data to start out trading. You must additionally do your own analysis and contemplate obtaining your separate financial adviser from a licensed broker.
Foreign exchange trading is incredibly risky, even though you have got years of ability and skill during this kind of trading. You’ll need some spare cash if you have got to cover a margin call.
Great Benefits of Forex trading
It’s no surprise that forex trading is one of the most popular forms of online trading. In recent years, we’ve seen the rise of the forex trading globally. The foreign exchange market has many benefits for forex traders which they enjoy. Below are 5 benefits of forex trading:
A free market
As you already know, forex brokers don’t charge traders any fees on trading transactions. There are no fees that traders have to pay. Forex brokers are paid through the spread representing the difference between the purchase price and the buying price of a currency. However, some forex brokers will charge you a commission on a certain number of transactions.
A market that never goes to sleep
Unlike other financial sectors, the FX market opens 24 hours a day from Sunday evening to Friday evening. For forex traders, this means they can trade stock anytime they want depending on their schedule. This also means that traders can combine their professional life with trading activities anytime.
A market where traders win on both rises and falls
Forex is based on the prediction of the currency. You predict whether the currency will fall or increase. Since forex is traded on pairs, it is beneficial to traders.
A market free from manipulation
Since forex is the world’s leading market, it is difficult for people to manipulate it. Traders must follow future trends to speculate how the currency will turn out to be. More than $4 trillion is traded daily which makes it the most liquidity market.
A predictable market
On the foreign exchange market, it is easy for you to avoid losing lots of money. There are usually some announcements made stating that there might be an interruption on the currency rate. To avoid this, you need to be on the lookout, read forex trading news, visit best Forex trading sites which usually announce latest forex news.
What is Currency Trading?
The term “currency trading” might mean various things. If you would like to find out regarding a way to save time and cash on foreign payments and currency transfers, you’ve come to the right place to learn about currency trading in South Africa.
Currency trading is the buying and selling currency on the FX market or foreign exchange market with the aim to make profit, usually known as “speculative forex trading”. Most brokers don’t offer speculative Forex trading.
How Forex Trading Works
The currency rate is that the rate at that one currency may be changed for another currency. It’s forever quoted in pairs just like the ZAR/USD (the ZAR and the US Dollar). Exchange rates fluctuates depending on economic factors like inflation, industrial production and politics events. These factors can influence whether or not you get or sell a currency pair.
Example of a Forex Trade:
The ZARUSD rate represents the number of USD one Rand can buy. If you think that the ZAR will increase in value against the USD, you will buy ZAR with USD. If the exchange rate rises, you will sell the Rand back, with aim to make a profit. Remember foreign exchange market carries a high risk and you can lose money.
Why Trade Currencies?
Forex is the world’s biggest financial market with about $5.3 trillion US Dollars in daily volume and 24-hour market action, 5 days a week. Some key variations between Forex and Equities markets are:
- Many FX brokers in South Africa don’t charge commissions, you pay solely the bid/ask spreads
- Forex opens 24/7 a day; 5 days a week, so you can trade decide when to trade and how to trade currency
- You will trade on leverage, however this will enlarge potential gains and losses
- You will target selecting from a number of currencies instead of from 5000 stocks
- Forex is accessible – you don’t millions to start trading forex
Why Currency trading isn’t for everybody
Forex trading on margin comes with a high level of risk, and should not be appropriate for everybody. Before deciding to trade forex you ought to fastidiously think about your investment objectives, level of expertise, and risk craving. Remember, you’ll sustain a loss of some or all of your initial investment, which suggests that you just mustn’t invest cash that you just cannot afford to lose. If you’ve got any doubts, it’s recommended to approach an independent financial advisor who will help you.
Forex Trading FAQs
If you are new to Forex Trading, you might be wondering about a lot of unanswered questions on your mind. The below are some of the most Frequently Asked Questions about Foreign Exchange.
FAQ1: What is Forex trading and how does it work in South Africa?
Example of a Forex Trade: The USD/ZAR rate represents the number of South African Rand one USD can buy. If you believe the US Dollar will increase in value against the Rand, you will buy US Dollars with the Rand. If the exchange rate increases, you will sell the USD back, making a profit.
FAQ2: Which currency pair is most profitable in Forex?
The most profitable FX pairs for scalping are EUR/USD, USD/CHF, GBP/USD, and USD/JPY.
FAQ3: How much do I need to start Forex Trading in South Africa?
Starting Forex trading with $500 allows Forex traders to have some flexibility in how they can trade; $100 does not. If you want to day trade FX, start with a minimum of $500. Limit risk to 1% of your account balance on every trade irregardless of what balance you start with.
FAQ4: Is forex trading tax free in South Africa?
The South African Revenue Service (SARS) treats profits from Forex Trading as gross financial gain and is so subject to taxation as per the Taxation Act…. each South African tax payer is needed to pay tax on their worldwide financial gain, and thus Forex traders should declare all their profits on their annual tax returns.
FAQ5: Can you trade South African Rand?
Yes, you can trade the ZAR. It is one of the most popular alternative for many day traders. Many SA forex brokers pair ZAR with the Great British Pound, US Dollars and Euros. Other brokers also pair the Rand with other currencies too.
FAQ6: What is the FSCA and the FSB?
FSCA (Financial Sector Conduct Authority) is South Africa’s investment regulatory body which regulates all non-banking service providers in Mzansi. It protects the markets and public from money laundering, financial crimes and other irregularities. The FSCA also regulates Forex brokers and trading on the JSE (Johannesburg Stock Exchange).
FAQ7: How do you trade Forex in South Africa?
You need to understand your needs. Find a broker and open an account. Before you trade with real money, trade on a demo account. After practicing with demo, start trading with real money.
FAQ8: What is a Forex Broker?
A forex broker works as an intermediary between the interbank system and Forex traders. The interbank refers to networks of banks that trade with each other.
FAQ9: How long does it take to withdraw money from Forex?
Withdrawals are usually processed and sent within one business day. First, you need to request permission to withdraw funds. Once the broker approves the withdrawal, they process it. It can take take a few days before you receive the payment. For Debit/Credit Cards, it takes up to five working days while e-wallets take 24 hours.