What is Forex Trading? How Does It Work in South Africa?

Forex trading definitionEven though the Johannesburg Stock Exchange (JSE) is the biggest in Africa and one of the 16 biggest in the world, the 5 trillion Dollar Forex Market dwarfs its size by a long shot. To that end and, unlike the JSE which is opened to professionals and big institutions, the FX market is anybody’s game.

As a resident of SA, would you rather give your money to a licensed JSE trader decked in expensive suit and tie, looking corporate as he swivels around in his fancy Sandton office trading on your behalf; or would you rather take charge of your cash, buying and selling currencies in the Forex market yourself?

The answer looks very obvious! But then, what is Forex, why is it so popular and yet welcomes everybody to trade with or without a license or experience?

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What is Foreign Exchange?

In the simplest of terms, Forex, or Foreign Exchange, is the worldwide market that allows traders to exchange one currency for another. It is very similar to exchanging currencies at the airport when you arrive at the airport in a new country – but this time, electronically.

A simple example:
You take your spouse for a tour of London, arrive at the airport, and change your wads of Rand for Pounds Sterling. After a month of sightseeing, you decide to go back to Cape Town. Now you need to leave all the British Pounds behind as they are not acceptable in SA as a legal tender.

So, you get back to the exchange booth at the airport and swap the leftover Pounds for Rand. After a month has passed, there is now a difference in the volume of the SA local currency you get per Pound because the Rand has fallen in value by a few cents and the Pounds have gained by a few pennies.

Friend, you have just participated in Forex trading – albeit in a crude, physical manner. The slight change in the exchange rates of the Rand and Pounds Sterling is how people make money in the FX market.

In summary, Forex trading is based on one’s belief that one nation’s currency would rise in value and the other nation’s currency would fall in value simultaneously – or vice versa. So, one buys the Pound Sterling and sells the Rand at the same time, believing (after some analyses) that the former would appreciate and the latter would depreciate in value.

If that prediction turns out to be true in a few minutes, hours, or days, the difference between the appreciated currency and the depreciated currency becomes a profit.

Done over and over again by trading electronically and winning these trades with appreciable accuracy, one can become rich – or at least financially stable.

How is the Forex Market Different From Other Types of Financial Markets?

It may have some similarities with other financial markets, but the FX market is quite different. Perhaps the most important distinction is that the Forex market is not regulated by a single central body. It is, on the other hand, decentralized but connected online.

Also, unlike local stock exchanges, the FX market does not rely on any clearinghouses that guarantee trades. So, to ensure everything is fair, traders exchange currencies based on mutually beneficial credit agreements.

Another feature that makes it different from futures, stocks, or options market is that there are no arbitration panels waiting to settle or adjudicate on disputes that may arise. This is where local regulatory bodies like the FCSA comes into play.

Also called ‘Spot FX,’ the Forex market is unique because it has no actual physical address but runs ‘over-the-counter’ (OTC) through electronic means within networks of banks.

This is also why it is called the ‘Interbank’ market.

How Big is That Market?

How big is the Forex Market?The FX market is HUGE! Put in perspective, it is far bigger than all the world’s major stock exchanges, combined.

The New York Stock Exchange (NYSE)’s $22.4 billion, which is the largest single stock market in the world, looks like measly coins when compared side by side with the FX market’s $5 trillion average daily trading volume. Amazing, right?

While banks and other big financial institutions like mortgage firms, pension funds, and others trade the biggest volumes daily, small (retail) traders – like you – makeup about 5-6% of the total volume which would amount to between $300 billion to $400 billion every single day of the week.

Think of it this way, your local Bureau de Change (currency exchange booths) is to offline currency exchanges as the Forex market is to online trading. The first physically exchange few hundreds or thousands daily between two, or a handful of customers, but the latter exchanges trillions between millions of people who do not even know each other, cutting across all countries in the world.

In this case, it is the FX broker’s duty to bring the buyers and sellers together on a single platform (even though they do not see or know one another) where they exchange their currencies with a hope to profit from the fluctuating prices that are as a result of the liquid or volatile nature of the Forex market.

Is the FX Market Always Open?

Technically, yes! The Forex market is popularly referred to as a 24/5 trading space, but in truth, it is open 365 days of the year. But there is a catch.

The market is open to retail traders between the opening of business in Australia/Asia and the close of business on Friday, New York time. You can also view the time in GMT.

  • Tokyo (Japan) Open time – 0:00 GMT – Monday
  • Tokyo (Japan) Close time – 9:00 GMT
  • London (England) Open time – 8:00 GMT
  • London (England) Close time – 17:00 GMT
  • New York (USA) Open time – 15:00 GMT
  • New York (USA) Close – 22:00 GMT – Friday

If you reside in SA or use the South African Standard Time (SAST), just add two hours to the respective times in GMT; that would be the exact time the market opens and closes where you are located.

While retail traders cannot carry out transactions during the weekend, institutional traders, like banks, do a lot of exchanges on Saturdays and Sundays, gaining massively from what is known as ‘gap trading.’

Even during national, regional, or worldwide holidays, the markets are still open – although very illiquid and slow during such days since most people are not behind their computers (or smartphones) placing trades.

In effect, the FX market is a year-round space for exchanging one currency for the other.

Can I Trade Forex on My Own?

Absolutely yes!

Before 1996, Forex trading was strictly open to financial institutions like banks and hedge fund managers and their likes. But with the development of software programs like the Meta Trader 4 and other related downloadable software, the market became liberalized, open to the general public.

Such software programs are tools used to analyze charts, to place trades, calculate margins, and also conduct many simple and complex functions that are essential to a successful trade. Nonetheless, there is still a big broker between the retail trader and the Forex market. Even though you can choose when to trade, how much to invest, or when to take your profits, it is the brokers’ duty to link you to the bigger FX market – for a fee or commission (called spread).

In effect, you do not need a license, you do not need to be a graduate of banking or finance, and you do not even need to be a millionaire to trade in the Forex market. A few hundred or thousand Rand can get you started.

Just locate the ideal broker that you think would meet all your requirements, connect to the internet via a desktop, laptop, or mobile device, download the best trading platform or software, and you are ready to start trading. Setting up all these can be completed in a single day or two.

Is it Legal to Trade Forex?

Yes, trading Forex is legal and safe. Be that as it may, ensure you approach only a trustworthy and licensed broker. This way, you can rest assured that your funds are safe.

To protect your funds and ensure that only legal trades are carried out in South Africa, the Financial Sector Conduct Authority or FSCA (previously known as the FSB) has been empowered by the national government to oversee all activities brokers, banks, and retail traders engage in when they trade currencies in the forex market.

What Currencies Can I Trade?

There are different classes of currency pairs a retail trader can choose from in the market. The most traded currencies are called the Major Pairs. These are:

  • The Euro and the U.S. Dollar (EUR/USD)
  • The U.S. Dollar and the Japanese Yen (USD/JPY)
  • The British Pound Sterling and the U.S. Dollar (GBP/USD)
  • The U.S. Dollar and the Swiss Franc (USD/CHF)

Added to that are the Commodity Pairs like the New Zealand and U.S. Dollar (NZD/USD), Australian Dollar and U.S. Dollar (AUD/USD), as well as the U.S. Dollar and the Canadian Dollar (USD/CAD).

There are yet other pairs popularly called Minor Pairs. In this category are the Euro and British Pound (EUR/GBP), the New Zealand Dollar/Japanese Yen (ZD/JPY), as well as the Swiss Franc/Japanese Yen (CHF/JPY), among others.

The SA Rand falls among the Exotic Pairs. In this group are the British Pound/South African Rand (GBP/ZAR), the New Zealand Dollar/Singapore Dollar (NZD/SDG), and the Australian Dollar/Mexican Peso (AUD/MXN), among others.

In all, there are dozens of pairs you can choose to trade in the Forex market as well as some not too pronounced, yet potentially profitable trades. Largely ignored by small-time traders are indices like the S&P 500, the UK 100, HSI 50, JAP 225, etc. Other items tradable on most FX platforms include Crude, Natural Gas, and Brent.

E-currencies (or Altcoins/Cryptocurrencies) like Bitcoin, Ethereum, Litecoin, and a number of others in their ranks, are also becoming quite popular among retail traders on FX platforms around the world.

How Risky is That Market?

Many see Forex as one of the riskiest investments to put their money in. There may be some truth in that assertion, but that is the perspective of people who are risk-averse or not interested in learning the ropes before investing.

Investment in the exchange of currencies, like everything else in life, cannot be mastered without first investing time in getting yourself educated. Taking time out to study books, read blog articles, follow daily news, and having an understanding of technical analyses using charts, is nonnegotiable if you want to succeed in trading currencies.

Like everything else in life, the FX market involves some level of risk which financial regulators mandate brokers make known to potential investors before they invest their money. With the potential to make a good profit – and even earn a living – comes the possibility of losing your funds too.

Therefore, having a sound risk management strategy before trading is crucial to succeeding in this highly volatile and liquid market.

Once you are sure the broker is registered with, and licensed by, the Financial Sector Conduct Authority (FSCA) and other relevant regulatory bodies, the next due diligence you need to carry out is on yourself. The fact that brokers give you huge leverage and stretchable margins does not mean you must trade to double your account size in a single day – that is a recipe for disaster!

To reduce Forex risk significantly, traders are advised to invest and trade only amounts that would not wreck them financially if they lose their funds. Another sound advice to always remember is to trade small lot sizes while exposing only a minute percentage of their total account size per trade.

Why is Forex Education so Important?

Forex Education and Video TutorialsTo buttress the point above, history and recent data have shown that only those with sound FX education truly succeed in the long run. Now, that does not mean you need a Master’s Degree in finance from an Ivy League school or something flamboyant like that, it only means investing your time and resources in the right books.

There are tens of thousands of books written about Forex trading out there – and most of them are good and useful. However, knowing which to read and follow its advice is even more crucial.

Books and other materials on fundamental analyses (which talk about how the FX market reacts to daily news, regional and local politics, as well as socio-economic activities) combined with those containing ideas on how to use technical analyses (which talk about how to use and recognize chart patterns, trends, and historical points on the charts) are a must if you desire to succeed in the Forex world.

Like it’s commonly said, education is never-ending! What many know about the market ten years ago may not be sufficient again today, and that bodes true for tomorrow – what you think you know today would not be enough to see you through when trading in the future.

Thus, you need to keep updating yourself with the latest trends and ideas that rule the Forex market. With so much knowledge at the back of your head, you can now go ahead with opening Demo Trading accounts so you can master the charts and other tools before risking your hard-earned money. This opportunity to test your knowledge with live feeds, risks, and actual market conditions is one highlight that makes the Forex market really special.

What Tools Would I Have Access to?

Other than books, articles, TV channels, and other such resources you can source for yourself, all Forex platforms provide dozens of tools to help your sojourn into financial analyses and growth.

Like the popular Meta Trader 4 or 5, many other platforms also provide indicators, customizable Expert Advisors (EA), historical Candlestick and Line charts that stretch many years back, and a lot more. Combined, these powerful tools, as well as knowledge gathered from other resources like books, would set you along the right path.

Why Should I Trade Foreign Currencies?

While many may talk about the inherent risks, those who desire to work at it and make something good out of the forex market look at the bright side: the advantages of trading Forex.

First off, there are no hidden and bogus fees here like those common in other markets. Other than the compensation brokers get by deducting the difference between the Bid and Ask price, there is practically no other fee involved. This feature also means there are no middlemen involved. You buy or sell currencies directly with other buyers and sellers on the platform.

Spreads in the Forex market are also quite low. Ideally, the spread (difference between the bid and ask) is set at 0.1 of the volume you are trading. It could go as low as 0.07 depending on the volume of the deal and the leverage with which you are trading at that moment.

Furthermore, you can rest assured that no single entity can control the activities of the market for an extended period of time. Even the biggest central banks in the world have little influence on the market – except for momentary spikes which might last no more than a few seconds to minutes, and then everything returns to normal again.

Another reason why the Forex market is so attractive is the opportunity to trade alongside the biggest financial entities in the world – but at your own pace and convenience. With Mini and Micro accounts, as well as ECN accounts available to choose from, you can start right where you are at this moment, yet enjoy the same access to the market just as huge banks are doing.

Conclusion

Even though every single idea or phrase that relates to Forex could form the basis for a whole book, having a clear idea of what Forex is opens a vista to a world of amazing opportunities and infinite possibilities.

Being the most liquid and biggest financial market in the world means everyone is welcome to partake in trading foreign currencies – either as a part-time or full-time job. There simply is no restriction, whatsoever!