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Learn Forex Trading In South Africa
A lot of people wonder if it’s worth spending time learning how to become a forex trader and if you can make money out of forex trading.
The simple answer is yes; it’s interesting learning how to trade forex online and it can be profitable. However, forex trading is not a “get rich quick” scheme and you can lose a lot of money if you don’t know what you’re doing.
Here’s what you need to know about trading forex online in South Africa.
WHAT IS FOREX TRADING?
Forex trading is also known as foreign exchange or FX trading. It involves speculating on price movements in the global currency market on the most traded market in the world. Over 5 trillion dollars’ worth of currencies are traded every day on the foreign exchange market.
You speculate on whether a certain currency will go up or down; and buy it at a price, hoping to sell it off for a profit. Foreign currency is always traded in pairs. For example, the Euro against the US dollar (EUR/USD).
The over-the-counter (OTC) foreign exchange market has no physical address. It’s a central exchange that trades 24-hours a day in a 5 day week through a network of global brokers, banks and financial institutions.
HOW TO TRADE FOREX?
- Choose a currency pair
What currency do you wish to trade?
There are over 65 currency pairs to choose from but the following 8 countries make up the majority of the trade:
- United States
- Eurozone (e.g. Germany, France, Italy, Spain)
- United Kingdom
- New Zealand
- Decide on the type of forex trade
There are three types of forex trading:
You bet on the price movement of currency pairs and the spread is the difference between the bid and ask price.
CFD (contract for difference)
This is a contract between an investor and an investment bank or forex broker. You trade a quantity of CFDs and the parties exchange the difference between the opening and closing prices, depending on your stake (EUR or USD).
You buy lots in the unit of the base currency. For example, if you trade EUR/USD; your stake is in Euros. A minimum stake size is 1 000.
- Buy or sell currency pairs
Once you’ve chosen the currency pairs you want to trade, you buy and sell it. Each currency has a Base currency or a Quote currency.
For EUR/USD; the base currency is on the left (EUR) and the quote currency is on the right (USD).
A base currency should strengthen against the quote currency or the quote currency should weaken against the base currency. If it does, you make a profit. If it doesn’t, you’ll lose money on the deal.
The spread is the difference between the SELL price (the bid price) and the BUY price (the offer price). What you can sell a currency for in exchange for another currency; that’s the cost of the trade.
- Add an order
An order is not compulsory but will protect you against extreme volatility in the market. It’s an instruction to the trading instrument to automatically trade to a certain point when the price reaches a level set by you.
You can use a STOP order or a limit order to insure you lock in any profits and keep your risk of losing money low.
The most common order is a Stop Loss order. This is an instruction to close the trade at a price that’s worse than the current market level. You get either a standard or a guaranteed stop loss order.
A Limit order is an instruction to close the trade at a price that’s better than the current market level and is used to lock in price targets.
- Close your trade
You can monitor your trade, add orders to open positions, add new trades and close trades from your computer or from your phone using an trading app.
To close your trade, you do the opposite of what you did to open the trade. If you bought 3 CFDs, than you’ll sell 3 CFDs to close the trade.
Your net open profit and loss is calculated and automatically shown in your account cash balance.
CAN I MAKE MONEY WITH FOREX TRADING?
Forex trading offers investment opportunities to grow money you already have. In other words, you can make a lot of money if you already have a lot of money. It’s not recommended as a full-time income stream if you’re the bread winner; but rather a source of income to supplement your mainstream earnings.
To make money with forex trading, open an account with a small amount to trade. Then try to grow it by taking reasonable risks. The money you make can then be channeled into other investments such as buying shares or paying off your bond.
IS FOREX TRADING RISKY?
The foreign exchange market can be unpredictable and volatile, and there is always a risk when speculating on price movements. It’s common for people to lose money trading forex and this is often the result of either inexperience or greed.
Forex rates can fluctuate dramatically due to unexpected or unprecedented economic and political events. Your profits can accumulate quickly but so can your losses.
To be a successful forex trader, you need to understand what risks are involved, manage them properly and trade in a disciplined manner.
Firstly, proper training and practical experience is critical. Start slowly using a demo account and then graduate to a mini account. Develop a disciplined trading strategy and know your limits.
Secondly, use trading functions such as Stop Loss or Limit orders to minimise your risks.
Lastly, don’t overtrade. Learn to trade forex with a sensible size investment with sufficient funds in your account to cover losses for the period you decide to hold open a trade.
UNDERSTAND CURRENCY PAIRS
Every forex transaction involves simultaneously buying and selling two currencies. These are currency pairs and include a base currency and a quote currency.
For example: EUR/USD 1: 1.0916
Bid price: Sell 1 Euro for 1.0916 US Dollars
Ask price: Buy 1 Euro for 1.0916 US Dollars
The spread is the Ask price minus the Bid price:
1.0918 - 1.0916 = 0.0002 (2 pips)
WHAT IS A PIP?
PIP stands for ‘point in price’. It’s a measure of the change in a currency pair in the forex market.
It can also stand for ‘percentage on point’ or ‘price interest on point’.
A Pip is used to measure currency price movements and reflects a change in a currency pair. Most currency pairs are quoted to 5 decimal places because the movement can be so small.
WHAT IS A TRADE POSITION?
A trade position is the term used to describe the progress of a trade.
A long position means a trader has bought currency speculating that the value will increase. When the trader sells the currency, his long position is closed and the trade is complete.
A short position means a trader has bought currency speculating the value will decrease. The trader hopes to buy back the currency at a lower value. When the trader buys it back, a short position is closed and the trade is complete.
WHAT IS A DAY TRADER?
A day trader starts and stops trading on a given day of the week to make the most of intra-day currency price movements. The bid-ask spread is limited and day traders can easily manage risks by taking a short position on currency prices.
WHAT IS A SWING TRADER?
Swing trading is a strategy that involves trading over a period of a few days or several weeks. The aim is to capture gains in currency price movements taking long or short positions for more than one trading session.
DEMO ACCOUNT versus LIVE ACCOUNT
The big difference between a demo and a live trading account is no capital is required for a demo account and therefore the risk of losing money is zero.
A trader uses a demo account to practice trading and the required discipline for a sound trading strategy. They have access to features such as real-time quotes and charts as well as basic trading tools and can transact as if they have real money invested in the deal.
Obviously, results from a demo account are not real and there are no profits to bank or losses incurred as you would experience in a live trading environment.
HOW TO CHOOSE A FOREX TRADING STRATEGY
You can trade forex for fun or you can trade it for profits. There is a lot of risk trading forex so you need to develop a disciplined trading style to minimise these future risks.
There are 2 options for forex trading:
Scalping is a very demanding strategy that depends on making sometimes a few hundred trades each day. It’s the most profitable trading strategy but also very risky. Scalping can take a toll on your emotional well-being because you experience extreme highs and lows over a long period.
Scalpers focus on making minimum profits from each trade but accumulatively, these small profits add up to large payouts. Scalpers use newly-released economic reports, market trends and sudden price surges to take advantage of forex price movements. They need tight spreads or ideally, no spreads at all.
- Price Action
Price action means taking a slower and more systematic approach to forex trading where the priority is to make profits from stable trades. This type of trader recognises market patterns formed by the ‘candlesticks’ and moving averages as well as reliable analytic reports.
Slow and steady wins the forex trading race but obviously with less risk, there is often less profit.
HOW TO OPEN A FOREX TRADING ACCOUNT IN SOUTH AFRICA
You can start trading forex in South Africa by registering and opening up an account on a reputable forex broker’s website. You need to verify your identity using a scanned copy of your ID or passport; and then open a demo account.
To trade in real-time with real money; you need to top up your account with the required capital amount for the type of trading account you choose.
In South Africa, there are 5 account types for forex trading:
- Demo accounts
These are accounts used to practice forex trading and virtual money is used for long or short positions. Demo accounts help you gain the knowledge and experience to trade foreign currency before putting up your own capital.
- Cent accounts
These accounts multiply whatever you invest by 100 and divide all payments by the same amount. It’s the best trading account to use if you trade without leverage and don’t have 100 000 USD.
- Mini accounts
This account doesn’t require starting capital limits and is often used for high-leverage trading. Mini accounts are a good option for beginner forex traders.
- Standard accounts
This account requires a 100 USD minimum starting capital. It provides good trading conditions and is used by the majority of experienced traders. Standard forex accounts have tighter spreads which suit scalpers.
- ECN Zero accounts
This account requires a 500 USD minimum starting capital. It provides 0-pip spreads in exchange for a transaction fee and are used by experienced traders with sizeable assets.
FOREX TRADING TIPS FOR BEGINNERS
If you’re interested in learning forex trading; start with the basics and gain as much knowledge and experience trading with a demo or mini account before investing your hard-earned income in real-time forex trading.
Don’t be mislead by false advertising that lures you in with the promise of huge financial gains. As mentioned, forex trading is not a ‘get rich quick’ scheme. You can make good profits but you can also watch in horror as all your capital is wiped out your account by an unexpected price movement.
This cannot be stressed enough. You need to study how the forex market works, understand currency pairs and what price movements put your capital at risk. The more time you invest up front learning forex trading, the more successful you’ll be in the long run.
Create a sound trading plan
This is a critical element for successful forex trading. It involves a clear outline of your profit goals, level of tolerance for risk, what trading strategy to adopt and how you’ll monitor performance.
Stick to your trading plan. Slow and steady wins the race; and a rational trading head will stand you in good stead.
Start with a demo account
Practice, practice, practice. This is the only way to develop the skills and intuition required to become a successful and profitable forex trader. Set up a risk-free demo account and graduate to a mini account which requires low capital deposits.
Do your research
Decide if you’re a fundamental or technical analysis trader. Fundamental traders watch the market carefully; following news on financial and political events that might positively or negatively affect a country’s currency.
Technical traders use advanced analysis tools which forecast market movements. They look for similar patterns that occurred in the past and speculate on positive or negative movements with enough hard evidence to support their gut feel.
It’s extremely important to know your trading limits and know how far you can push a trade or when to fold. This requires discipline and a strong trading plan to restrict reckless trading.
You need to decide up front how much you’re willing to risk on each forex trade, what your leverage ratio is and how much you can afford to lose. The most important thing is to know when to stop a forex trade.
This is where features such as Stop and Limit orders are important; they get you out of a potentially poor trade early and limit your risks with forex trading.
Patience and discipline
You’re getting the picture!
With forex trading, slow and steady wins the race if you’re a beginner. A sound trading plan with loads of patience and discipline can make forex trading fun and interesting, rather than risky and traumatic.
You can explore trading options and revise your trading plan at different stages but the aim is to be consistent.
Choose the right forex trading partner
This is very important because there are many dodgy trading brokers and fly-by-nights in the forex trading market in South Africa. Do your homework and pick a reputable online trading company that will provide decent educational material and support to get you started and trading forex.
It is critical that you find a forex broker in South Africa that’s registered and regulated by the South African Financial Services Board.
You can choose a forex broker that’s registered and regulated in another country by a financial services board but make sure they are legitimate and are a forex trading company that can be trusted.
ARE FOREX BROKERS REGULATED IN SOUTH AFRICA?
Yes, the Financial Services Board monitors operations of forex brokers in South Africa and ensures they comply with regulatory criteria. All activities are overseen by the Financial Advisory and Intermediary Services which, together with the Financial Services Board, enforce strict and reliable regulations.
Choose a forex broker you can trust. They form a vital part of your forex trading experience and should offer the necessary support to trade in a responsible and profitable manner.
Here are a few questions to ask when reviewing forex brokers in South Africa:
- is the broker regulated?
- does the broker offer low spreads?
- is high leverage on offer?
- is speed of execution guaranteed?
- do they offer a variety of trading accounts, including a demo account?
- do they offer fundamental and/or technical analysis support?
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