Learn About Forex Trading For Beginners in South Africa- What It Is and How It Works (2024)

What is forex trading? Forex, also known as foreign exchange, can bedescribed as a network of buyers and sellers, who transfer currency betweeneach other at an agreed price. It is how individuals, companies and centralbanks convert one currency into another.

KeyTakeaways

● Unlike shares orcommodities, forex trading does not take place on exchanges but between twoparties.

●The forex market is run by a global network of banks,spread across four major forex trading centres in different time zones: London,New York, Sydney, and Tokyo. There’s no central location, therefore you cantrade forex 24 hours a day.

●The foreign exchange market is a global marketplacewhere traders exchange national currencies.

●Forex works by simultaneously buying one currencywhile selling another.

What Is the Forex Market?

Many ask what is forex trading. The foreignexchange market is a global decentralised or over the counter (OTC) market forthe trading of currencies. This market determines foreign exchange ratesfor every currency. It includes all aspects of buying, selling and exchangingcurrencies at current or determined prices. In terms of trading volume, it isby far the largest market in the world, followed by the credit market.

This market is open 24 hours, 5 and half days a week. There are variouscurrencies traded around the world, within the biggest financial cities, whichinclude London, Singapore, Zurich, New York City, Hong Kong, Sydney, Chicago,Tokyo, Frankfurt, Shanghai, and Paris. These cities are all in different timezones, meaning that trades are happening almost all the time.

How Does the Forex Market Work?

A trader buys one currency and sells another, and the exchange rateconstantly fluctuates based on supply and demand.

Where Is It?

There is no dedicated physical location where trading takes place. Forextrading takes place in numerous locations around the world 24 hours a day.

Who Trades on It?

The forexmarket not only has many players but many types of players. Trading online forexcan involve trades from Individual Investors, Commercial & InvestmentBanks, Central Banks, Investment Managers and Hedge Funds, MultinationalCorporations.

What is a base and quote currency?

In forex, currencies are traded in pairs. The first currency is calledthe base currency and the second currency is called the quote currency. Forexample, AUD/USD, means that the base currency is the Australian dollar, andthe quote currency is the US dollar. The quote currency is sometimes referredto as the counter currency.

The best way to understand base and quote currencies is in terms ofexchange rates. An exchange rate of 1.14020, for example, would mean that 1unit of base currency would cost 1.14020 units of quote currency. In this case,to own 1 AUD the equivalent of 1.14020 USD is needed. This means that the firstcurrency in a pair is quoted against the second currency.

How Currencies Are Traded

Currencies are traded in pairs, so that in every trade one currency isexchanged for another at a given rate, determined by the market. These pairslook something like EUR/USD = 1.08. This means that one Euro buys USD at $1.08.The base currency appears first and the quote currency (or counter currency)second.

There are more than 170 currencies worldwide, and the U.S. dollar isinvolved in most of the forex trading. For a trader, it’s important to know itscode: USD. The second most popular currency in the forex market is the euro,it’s accepted in 19 countries in the European Union (code: EUR).

Othermain currencies, in order of popularity, are the Japanese yen (JPY), theBritish pound (GBP), the Australian dollar (AUD), the Canadian dollar (CAD),the Swiss franc (CHF) and the New Zealand dollar (NZD).

HowForex Trades Are Quoted

Understandingthe quotation and pricing structure of currencies is essential for anyonewanting to trade in the forex market. Market makers tend to trade specificcurrency pairs in set ways, either direct or indirect, which meansunderstanding the quote currency is paramount.

Acurrency pair's exchange rate reflects how much of the quote currency is neededto be sold/bought to buy/sell one unit of the base currency. As the rate in acurrency pair increases, the value of the quote currency is falling, whetherthe pair is direct or indirect.

Forexample, the cross rate between the U.S. dollar and the Canadian dollar isdenoted as USD/CAD and is a direct quote. This means that the CAD is the quotecurrency, while the USD is the base currency. The CAD is used as a reference todetermine the value of one USD. From a U.S.-centric point of view, the CAD isthe foreign currency.

On theother hand, the EUR/USD denotes the cross rate between the Euro and the U.S.dollar and is an indirect quote. This means that the EUR is the base currency,and the USD is the quote currency. Here, the USD is the domestic currency anddetermines the value of one EUR.

Types of Currency Pairs

Major,Minor and Exotic

There aremany currency pairs for traders to choose from when placing a trade in theforex market. Major currency pairs are any pair that include the US dollar(USD), which currently holds the position of the largest economy in theworld. Major pairsare the most widely traded currencies in the foreign exchange market. Here arethe 7 major forex pairs that are considered to be the most popular across theworld, all of which can be traded on using spread bets and CFDs:

● The euro and US dollar: EUR/USD

● The US dollar and Japanese yen: USD/JPY

● The British pound sterling and USdollar: GBP/USD

● The US dollar and Swiss franc: USD/CHF

● The Australian dollar and US dollar: AUD/USD

● The US dollar and Canadian dollar: USD/CAD

● The New Zealand dollar and USdollar: NZD/USD

The majorpairs make up 75% of all forex trades. The majors are the most liquid andwidely traded in the forex market.

Minortrading pairs occur when a major currency is traded with another, such as theSwiss Franc and the Euro. Without the appearance of the US dollar, the currencypair in question is defined as a minor currency pair.

An exotic currency pair is a term used todescribe the trading of a developing economy’s currency – as either thebase/counter currency – with another major currency.

What affects the forex market?

Globalactivity in foreign exchange trading means that events happening worldwidesignificantly impact forex more than ever before.

Central banks

In its simplest context, Central Banks areresponsible for overseeing the monetary system for a nation (or group ofnations); however, central banks have a range of responsibilities, fromoverseeing monetary policy to implementing specific goals such as currencystability, low inflation, and full employment.

Centralbanks also generally issue currency, function as the bank of the government,regulate the credit system, oversee commercial banks, manage exchange reservesand act as a lender of last resort.

News reports

Forextraders are drawn to news releases for their ability to move forex markets.'News' refers to economic data releases such as GDP and inflation, and forextraders tend to monitor such releases considered to be of 'high importance'.

Market sentiment

Essentially,market sentiment is the consensus among investors around the current state ofthe markets or a given security.

The generalattitude among investors can cause fluctuations and price movements in thestock market. A common example of stock market sentiment is that prices risewhen there’s a bullish market sentiment and fall when investors are feelingbearish.

Types of Markets

There are different markets within Foreign Exchange which include: Spotmarket (the largest), forwards and futures which are most popular withfinancial firms and companies.

Spot Market

Transactionsdemand quick payments at the prevailing exchange rates. It requires immediatecurrency delivery or exchange on the spot- often within 48 hours. Spottransactions are those in which currency exchange occurs two days following thecontract date. The spot rate is the effective exchange rate for a spottransaction, and the spot market is the market for such transactions. When anincrease or decrease in the commodity’s price occurs between the actualagreements and traded time, traders face uncertainty. Spot market traders areless prone to such uncertainties in the market.

Forwards and Futures Markets

Theforward market involves transactions in which exchange takes place at aspecified date in the future for a specific price. In other words, the forwardcurrency market entails making a contract today to purchase or sell foreigncurrency in the future. Forward rates are similar to spot rates, except thedelivery takes place much later. However, there may be differences between thespot and forward rates. The difference is the forwarding margin or swap points.In addition, traders can customise the period of delivery at their will. Thisexchange helps exporters and importers avoid the challenges of ratefluctuations by using relevant forward exchange contracts.

Afutures contract is another version of a forward contract traded publicly on afutures exchange. It includes the price and the time in the future to buy orsell an asset, just like a forward contract. Unlike a forward contract, afutures contract has a fixed contract size and maturity date. Futures can onlybe exchanged on an organised exchange, and they undergo competitive trading. Aforward contract does not require margins, unlike all players in the futuresmarket. Furthermore, traders must pay an initial margin into a collateralaccount to create a future position.

Uses of the Forex Markets

Currenciesare typically uncorrelated with other asset classes, meaning that theirperformance does not necessarily move in tandem with the stock or bond market.

2 standoutfeatures of currencies as an asset class:

● Individuals can earn an interestrate differential between two currencies.

● Individuals can profit from changein the exchange rate.

Forex for Hedging

Forex hedging is the act of strategicallyopening additional positions to protect against adverse movements in theforeign exchange market.

Hedgingitself is the process of buying or selling financial instruments to offset orbalance your current positions, and in doing so reduce the risk of yourexposure. Most traders and investors will seek to find ways to limit thepotential risk attached to the exposure, and hedging is just one strategy thatthey can use.

Forex for Speculation

This formof trading is where traders look toprofit from market price movements - whether the market goes up or down. Itstands in contrast to traditional investing, which looks deeply at thefundamental values of investment.

The art ofspeculation is not fixed in a single direction. This means that speculation canallow us to buy an asset (if we expect its price to increase) or sell an asset(if we expect its price to decrease).

Is Forex Trading Safe for Beginners- Risks to be aware of

One of the reasons more and more traders flock to the Forex markets isthat the barriers to entry to trading currencies are so low. All you need tostart trading is a computer, a small amount of capital, internet connection toaccess your online trading platforms, and (most importantly) trading knowledge.

Below arerisks you should be cognisant of:

Leverage Risk

Leverageis, in general, a powerful and useful feature of forex trading. It gives you theflexibility to take significant positions on key currency pairs without tyingup excessive amounts of capital and magnifies the size of any profits you mightmake. However, leverage can be dangerous. If you are wrong about a trade, itacts to magnify your losses.

Interest Rate Risk

Theinterest rate risk is the possibility that the value of an investment (forexample, of a bank) will decline because of an unexpected change in interestrate.

Generally,this risk arises on investment in a fixed-rate bond. When the interest raterises, the market value of the bond declines, since the rate being paid on thebond is now lower than the current market rate. Therefore, the investor will beless inclined to buy the bond as the market price of the bond goes down with ademand decline in the market. The loss is only realised once the bond is soldor reaches its maturity date.

Higherinterest rate risk is associated with long-term bonds, as there may be manyyears within which an adverse interest rate fluctuation can occur.

Interestrate risk can be minimised either by diversifying the investment across a broadmix of security types or by hedging. In case of hedging, an investor can enteran interest rate swap.

Transaction Risk

Transactionrisk refers to the adverse effect that foreign exchange rate fluctuations canhave on a completed transaction prior to settlement.

● Transaction risk is the chance thatcurrency exchange rate fluctuations will change the value of a foreigntransaction after it has been completed but not yet settled.

● It is a form of currency exchangerisk.

● Transaction risk will be greaterwhen there exists a longer interval between entering a contract or trade andultimately settling it.

How to Start Trading Forex - The Basics

When you learnhow to trade forex, it's not hard to see why it is such a popular market amongtraders. Learn forex trading for beginners by understanding the basics of howdoes forex trading work in South Africa.

Decide how you’d like totrade forex

A lotof trading takes place between major banks and financial institutions, whichbuy and sell massive amounts of currency every single day. For individualtraders who don’t have the means to make billion-dollar forex trades, there aretwo main ways to get involved: forex CFDs or trading fx via a broker.

Learn how the forexmarket works

The meaningof forex? One of the first things to learn when you want to trade currencies ishow the forex market operates, which is very different to exchange-basedsystems such as shares or futures.

Insteadof buying and selling currencies on a centralised exchange, forex is bought andsold via a network of banks. This is called an over-the-counter, or OTC market.It works because those banks act as market makers – offering a bid price to buya particular currency pair, and a quote price to sell a forex pair.

Open an account

If youwant to trade forex via CFDs, you’ll need an account with a reputable tradingprovider.

Build a trading plan

Buildinga trading plan is particularly important if you’re new to the markets. Atrading plan helps take the emotion out of your decision making, as well asproviding some structure for when you open and close your positions. You mightalso want to consider employing a forex trading strategy, which governs how youfind opportunity in the market.

Onceyou have chosen a particular forex trading strategy, it’s time to apply it. Useyour favoured technical analysis tools on the markets you want to trade anddecide what your first trade should be.

Evenif you want to be a purely technical trader, you should also pay attention toany developments that look likely to cause volatility. Upcoming economicannouncements, may echo across the forex markets – something your technicalanalysis might not consider.

Choose your forex tradingplatform

Choosing a forex trading platform that works for you isimperative. Look for one that can be personalised to suit your trading styleand preferences, with personalised alerts, interactive charts and riskmanagement tools.

Those are the basics of forex trading.

How much do you need to start FXtrading

Overall, the minimum amount of money you need to trade successfully ordo a forex investment on the South African forex market is on average R1800 ZAR or $100 USD.

That’s how much money to start forex trading in South Africa. Themajority of brokers have a minimum deposit requirementfor opening a live trading account with them, and the size of this deposit willvary depending on the broker, their offering, and their targeted tradingmarket.https://sashares.co.za/best-forex-brokers-south-africa/

Whilethere are some forex brokers who don’t have a minimum deposit requirement, mostbrokers won’t allow you to start trading without having first deposited intoyour live trading account.

Generally,the minimum deposit requirement across the broad range of brokers starts at$100, while with those brokers who don’t have a minimum requirement you couldtechnically begin trading with as little as $1 (R15).

Forex Terminology to Know

Everyindustry has its own jargon and Forex is not different, here are a few termsthat you should be familiar with.

Forex account

Forex accounts give investors and traders the ability to trade all major currency pairs and some emerging market pairs.

Micro forex accounts

A forex micro account allows beginners and retail traders to engage in foreign exchange trading using smaller trading sizes.

Miniforex accounts

● A forex mini account allowsbeginners to engage in foreign exchange trading account using smaller tradingsizes, known as mini lots.

● Mini lots are one-tenth the size ofa standard lot, meaning they represent 10,000 currency units instead of 100,000units.

Standard forex accounts

The mostcommon is a standard account with 100:1 leverage and standard lots up to$100,000 in notional value.

Ask

Refers tothe lowest price at which a seller will sell the stock.

Bid

The price at which the forexbroker is willing to buy (from you).

Contract for difference

Refers to a contract that enablestwo parties to enter into an agreement to trade on financial instruments basedon the price difference between the entry prices and closing prices.

Leverage

Similar to a “loan” that the broker gives thetrader so that the trader has more capital to trade with than what he or sheinitially deposited.

Spot Forex

The purchase or sale of forex 'on the spot',which means the exchange takes place at the exact point that the trade issettled.

Pip

The unit ofmeasurement to express the change in value between two currencies.

Spread

The difference between the bid (sell) price andthe ask (buy) price of a currency pair.

Margin

Margin isthe collateral (or security) that a trader has to deposit with their broker tocover some of the risks that the trader generates for the broker.

Bear Market

A bearmarket is defined by a prolonged drop in investment prices — generally, a bearmarket happens when a broad market index falls by 20% or more from its mostrecent high.

BullMarket

A bullmarket is an extended period when stock prices rise, and investors are optimistic.

Broker

Whatis forex broker? A broker is an individual or firm that acts as an intermediarybetween an investor and a securities exchange.

Exchange

Amarketplace where the trade of financial instruments such as commodities andsecurities occurs.

Close

A tradethat is no longer active and has been closed by a trader.

Day Trading

The buyingand selling of stocks, foreign exchange, commodities and other assets orfinancial derivatives during a single trading session.

Choosing the Best Forex TradingPlatforms for Beginners

If you are interested in Forex trading forbeginners, you can look up a list of forex brokers in South Africa. The bestforex brokers for beginners all share three essential qualities:

Thefirst and most important quality is the broker's status as a well-regulated andhighly trusted brand. Second, is the provision of a user-friendly web-basedplatform with a balanced variety of educational resources. Third is access toquality and actionable market research.

Trust

Trusting your trading platform is essential.You need to be sure about the accuracy of quoted prices, speed of data transferand the fast execution of orders.

You should be able to get information in real time, theplatform should always be available so that you can rest assured that it’s the bestforex trading platform in South Africa.

Security

It’s impossible to separate trading and datasecurity. In an era where information is digital and global, keeping sensitivedata safe is the first concern of businesses and individuals.

Ensure that your broker is reputable and thatyou’re using a reputable trading platform, this will help decrease the risk offunds or personal information being tampered with.

Independent account management

A forex trading platform must enable you to manage your trades andaccount independently without the assistance of a broker. This assists inkeeping you agile, you can act as soon as a market moves.

Analysis

A vitalpart of a trader's success, especially those who trade frequently, is theability to evaluate patterns in trading data.

Therefore,it's important to know whether the platform you choose already has an embeddedanalysis tool, or there’s an external tool that you can use which requires thatyou exit the platform. Most traders prefer technical analysis tools within thesame platform that gives them information in real time.

Automated Trading Functionality

Autotrading enables you to carry out many trades in a small amount of time, withthe added benefit of taking the emotion out of your trading decisions. That’sbecause all the rules of the trade are already built into the parameters youset. With some algorithms, you can even use your pre-determined strategies tofollow trends and trade accordingly.

Basic Forex Trading Strategies

In this quick guide, we’ll give you a rundownof 7 simple forex trading strategies as a forex trading guide for beginners.Each one is easy to understand and ideal for anyone who’s building up theirskills.

By takingthe time to master these fundamentals, you’ll be able to make simple tradeswith confidence. Better yet, you set yourself up to try more advanced tradingtechniques down the line.

Breakout

A “breakout” is any pricemovement outside a defined support or resistance area. Breakouts can occur whenprices increase above resistance areas, known as “bullish” breakout patterns.

Moving Average Cross

A simple technical analysis toolthat smooths out price data by creating a constantly updated average price.That average can be taken over different periods of time – anything from 20minutes, to three days, to 30 weeks or any other time period a trader chooses.

Donchian Channels

Has 3 parts to it:

●Upper band – the20-day high

● Middle band – theaverage of the Upper and Lower band

●Lower band – the20-day low

The Donchian Channel uses adefault setting of 20-period, but you can adjust it to your preference (like30-day, 50-day, etc.).

Scalp trading

In thistrading method, traders buy and sell stocks multiple times within a day for asmall profit.

Daytrading

Involvesactively buying and selling securities within the same day, trying tocapitalise on short-term changes in price.

Swing trading

Refers tothe medium-term trading style that is used by forex traders who try to profitfrom price swings.

Position trading

Buys aninvestment for the long term with the expectation that it will appreciate invalue.

Charts Used in Forex Trading

If you wantto understand how to trade forex in South Africa you need to familiariseyourself with the below. There are numerous charts out there, these are the 3most popular in the trading world.

Line Charts

Thesimplest type of forex chart, it connects a series of selected price datapoints. The end product is a single line that moves from left to right,illustrating the peaks and troughs of price action. Common price points areopening and closing prices.

BarCharts

A type of chartthat depicts the periodic behaviour of a currency pair. In contrast to linecharts, the bar chart includes four price points: the opening price (O), high(H), low (L), and closing price (C). Given this information, bar charts areoften referred to as OHLC charts.

CandlestickCharts

Showseverything that a bar chart shows: a currency pair’s trading range as well asthe bullish or bearish sentiment. This is done by noting the opening price,closing price, high, and low.

Forex Trading Example

Let’s have a look at a forex trading example,assume a trader believes that the EUR will appreciate against the USD. Anotherway of thinking of it is that the USD will fall relative to the EUR.

Thetrader buys the EUR/USD at 1.2500 and purchases $5,000 worth of currency. Laterthat day the price increased to 1.2550. The trader is up $25 (5000 *0.0050). If the price dropped to 1.2430, the trader would be losing $35 (5000 *0.0070).

Prosand Cons of Trading Forex

Pros Explained

ConsExplained

10 Tips for Beginner Forex Traders

If you’veever asked yourself this question, how to be a forex trader? Simply have a lookat the below.

Know Your Markets

We cannotoverstate the importance of educating oneself on the forex market. Take thetime to study currency pairs and what affects them before risking your own capital;it’s an investment in time that could save you a good amount of money.

Stick to Your Plan

Creating a trading plan is a critical componentof successful trading. It should include your profit goals, risk tolerancelevel, methodology and evaluation criteria. Once you have a plan in place, makesure each trade you consider falls within your plan’s parameters. Remember:you’re likely most rational before you place a trade and most irrational afteryour trade is placed.

Practice

Putyour trading plan to the test in real market conditions. You’ll get a chance tosee what it’s like to trade currency pairs while taking your trading plan for atest drive without risking any of your own capital.

Forecast the Market Conditions

Fundamentaltraders prefer to trade based on news and other financial and political data;technical traders prefer technical analysis tools such as Fibonacciretracements and other indicators to forecast market movements. Most tradersuse a combination of the two. No matter what your style, it is important youuse the tools at your disposal to find potential trading opportunities inmoving markets.

Know Your Limits

This issimple yet critical to your future success. This includes knowing how muchyou’re willing to risk on each trade, setting your leverage ratio in accordancewith your needs, and never risking more than you can afford to lose.

Know When to Stop

You don’thave time to sit and watch the markets every minute of every day. You canbetter manage your risk and protect potential profits through stop and limitorders, getting you out of the market at the price you set. Trailing stops areespecially helpful; they trail your position at a specific distance as themarket moves, helping to protect profits should the market reverse. Placingcontingent orders may not necessarily limit your risk for losses.

Leave Your Emotions Outside the Door

You have an open position and the market’s notgoing your way. Maybe you could make it up with a trade or two that don’t fitwith your trading plan.

“Revengetrading” rarely ends well. Don’t let emotion get in the way of your plan forsuccessful trading. When you have a losing trade, don’t go all-in to try tomake it back in one shot; it’s smarter to stick with your plan and make theloss back a little at a time than to suddenly find yourself with two cripplinglosses.

Stay Slow and Steady

One key totrading is consistency. There’s lots of talk about is trading forex reallyworth it? All traders have lost money,but if you maintain a positive edge, you have a better chance of coming out ontop. Educating yourself and creating a trading plan is good, but the real testis sticking to that plan through patience and discipline.

Don't Fear Growth

Whileconsistency is important, don’t be afraid to re-evaluate your trading plan ifthings aren’t working like you thought. As your experience grows, your needs maychange; your plan should always reflect your goals. If your goals or financialsituation changes, so should your plan.

Choose the Right Broker for You

It’scritical to choose the right trading partner as you engage the forex market.Pricing, execution, and the quality of customer service can all make adifference in your trading experience.

The Bottom Line

Traderswith limited budgets may want to consider day trading or swing trading insmaller amounts. This is simpler in the forex market than in other markets.Those who have longer-term plans and more funds should consider longer-termfundamentals-based trading or a carry trade can yield profitability. Tradersshould focus on macroeconomic fundamentals that influence currency values,experience with technical analysis can be beneficial in assisting new forextraders be more profitable.

FAQ

Which Currencies Can I Trade in?