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Forex Trading Finder™: Compare forex trading tools
Discover how to generate wealth and build for your future by trading forex in South Africa.
When investors trade currencies in the large liquid foreign exchange market, they’re engaging in forex trading. Forex, short for foreign exchange, offers opportunities to turn a profit in the world’s most traded 24/7 market, where traders are exchanging one currency for another at an agreed price. Given its complexities, forex trading is highly suited to experienced investors in South Africa, though many new traders quickly succumb to the excitement of this dynamic market.
Forex traders come to the market with one main aim: profit from changes in the value of one currency against another. They do this by investing whichever way they think forex prices will fluctuate in the future.
For example, if experts anticipate that the South African rand will decrease in value against the US dollar, forex traders will sell their ZAR dollars and buy US dollars. If the US dollar then increases in value, the trader gains greater purchasing power to buy more ZAR than they initially had, resulting in a tidy profit.
On the global forex market, currencies are quoted in pairs, that is, in terms of their value against other currencies. In the forex market, these pairs are expressed as ZAR/USD, GBP/EUR and USD/GBP. You’ll sometimes hear these pairs referred to by nickname. Keeping things lively, AUD/USD is often called the “Aussie,” EUR/GBP the “Chunnel,” GBP/USD the “cable” and USD/CHF the “Swissy,” among others. South African brokers also offer trading in rand, with currency pairs like ZAR/EUR, ZAR/USD and more available.
What are the benefits of forex trading?
The right investor will find that forex trading offers a wide range of advantages, including:
- Large market size. Forex is the world’s largest financial market, with trades going on at all hours. This breadth of the market is one of the key reasons that give forex trading opportunities for profit.
- Low learning curve. Compared to other financial instruments, forex has relatively low barriers to entry, including not having a steep learning curve. This makes it an ideal starting point for beginners. It does not require a large initial investment and much trading skill.
- 24/7 accessibility. The global forex market runs Monday through Friday around the clock. This means that forex prices constantly fluctuate, offering plenty of investment opportunities for traders.
- Low transactional costs. Transaction costs in the forex market are typically included in the price, in the form of the spread. Some brokers may also charge a commission on top of the spread, which may either be a flat fee or based on a percentage of the transaction amount.
- Ability to go long or go short. If you speculate that a currency pair is going to increase in value, you can purchase it (go long). Similarly, if you believe that it will decrease in value, you may sell it (go short). This means that the forex market offers profit potential from both rising and falling prices.
- You can benefit from leverage. Leverage allows investors to conduct a trade without putting up the full amount of that trade, controlling a large amount of money using a little of their own and borrowing the rest. This means there is a much higher potential for profit from a small initial outlay. Unfortunately, this also means a greater risk of suffering a loss.
- Market with high liquidity. When trading, liquidity refers to the ease with which an asset can be quickly converted into cash. This depends on how active a particular market is. The global scale of the forex market combined with its high trading volume and 24-hour accessibility make the forex market the most liquid market in the trading world.
- Forex volatility. The forex market can be highly volatile, which means that there can be significant movements in currency values, which in turn may lead to opportunities for substantial profits.
Graham is a veteran investor who buys and sells currency pairs. Anticipating that the US dollar will increase in value against the euro, Graham purchases $100,000 in US dollars using a forex contract at €0.90. Because his forex trading platform allows him to place trades at a margin of 1%, this investment costs Graham $1,000 to place.
Time shows that Graham's prediction is correct. The US dollar rises to €0.925, resulting in a profit of around €1,575 or $1,700 for Graham after factoring in the cost of his investment.
* This is a fictional, but realistic, example.
What forex trading platforms are available?
Several forex trading services are available to South African investors, some geared toward beginners and others for experts.
- Oanda Corporation
- TradeKing Forex
- IG Markets
- Fortex Capital Marketing
- Interactive Brokers Limited
- OptionsXpress by Charles Schwab
- TD Ameritrade Forex
Compare the fees and benefits of several providers before deciding on the platform that’s for you.
How to compare forex brokers
Here are some points to consider when you’re looking for a forex broker in South Africa:
- Regulatory compliance. The most important thing to check when choosing a forex broker is whether it’s registered as a member of a regulatory body. This ensures the safety of deposits and the integrity of the broker.
- Currency pairs offered. While there are many currencies available for trading, you’d most likely focus on a handful that have the greatest liquidity or interest you most.
- Low spreads and commissions. Forex brokers charge a spread, which is the difference between the bid and ask of a forex pair. Spreads can be narrower or wider based on a variety of factors, and lower spreads mean less cost for traders. Some forex brokers also charge commission fees on top of the spread. Note that this doesn’t necessarily mean that it’ll cost more than a broker that charges no commission as they can instead profit from wider spreads. So make sure to shop around for a broker with competitive fees.
- Initial deposit. Many forex brokers offer accounts with varying initial deposit requirements.
- Trading platform and tools. Many forex traders use the MetaTrader4 (MT4) or MetaTrader5 (MT5) platforms for trading. Some may also offer their own proprietary software. Whatever software is used, just make sure that the broker’s platform is sufficiently equipped with technical and fundamental analysis tools, customisation and other trading features that you need.
- Ease of withdrawal and deposit. Each forex broker has specific account withdrawal and funding policies. You may be able to fund your account with methods such as credit card or a bank transfer. As for withdrawals, brokers typically allow wire transfers and may charge a fee for the service. Make sure the broker you’ve selected offers convenient deposit and withdrawal options.
- Customer service. Forex trading is available 24 hours a day, so the ideal forex broker should offer responsive and round-the-clock customer service. Check if the broker has live chat or phone support options, as well as their average wait times.
- Demo account. Brokers often provide paper trading accounts with virtual funds for customers to test their trading strategies without having to risk any money in real life.
- Additional services. Other beneficial extras that forex brokers might provide are access to the latest news, market analysis, trading strategies and other educational materials such as webinars and courses.
How much does forex trading cost?
As with any other form of investment, you need to carefully review the fees and charges that apply specifically to trading forex:
What margin is required in order to make a trade? A margin of 0.5%, 1% or more will affect the total amount you’ll spend to buy or sell forex. For instance, if your account has a margin of 1%, a trade worth R100,000 will require you to spend R1,000.
Most platforms in South Africa charge a commission for every trade you make. These fees can be as low as a few cents per thousand dollars, but some providers charge no commission on your trades. You may pay a fee to pay by credit or debit card.
Finally, consider the spread, or the difference between the buy and sell prices for each currency pair. The spread is effectively what a broker or trading platform charges you to make a trade. Look for a trading platform that offers tight spreads to minimise your overall costs.
What are some common forex trading strategies?
With so many experts in South Africa touting strategies for nearly any kind of investment, it’s no surprise that you’ll find several strategies for trading forex. Here are 3 common strategies used by investors:
- Technical analysis. This strategy is used by investors when trying to predict future price movements and involves analysing historical data and new, emerging patterns. Investors look at past performance and trends to make their investing decisions.
- Day to day trading. This strategy is based on the simple premise that you don’t hold forex positions overnight. In general, the longer you hold open a position, the greater risk of suffering a loss. To minimise risk, traders can close all positions held before the end of the trading day.
- Support and resistance levels. This strategy involves researching the past fluctuations of a currency and using what you’ve learned to predict future price movements. The previous upper limit of a price is called its resistance limit, and the previous lower limit is its support limit. Traders use these resistance limits and support limits to make an educated guess as to when a currency’s value might rise or fall.
What are some of the risks associated with forex trading?
Before you start trading forex, research and understand the risks involved with this sort of trading.
- Even though you’ll put down only a small percentage of the value of your trade upfront, you are ultimately responsible for the entire amount of your trade.
- Forex rates are volatile and can quickly move against you, possibly resulting in a significant loss of money.
- Markets are open 24 hours a day, which can result in devoting plenty of time to tracking open positions.
- Predicting currency markets is difficult, and a wide range of factors affect currency pairs.
- Even a stop-loss order, a hedging tool designed to minimise your losses, offers only limited protection against the risks involved.
Can foreign exchange make me rich?
While it’s possible to make money trading, it’s also inherently risky. Experience trading, time and the ability to make upfront investments – and recover in the case of losses – are all necessary if you want to make meaningful gains.
Trading currency isn’t a get-rich-quick business. You’ll need to dedicate a fair amount of time to watching the markets, and if you’re inexperienced, you’ll also need to spend time immersed in learning the system. Strategies come in handy, but no one strategy is right for every situation.
How to open a forex trading account
Most forex trading platforms in South Africa allow potential traders to apply online for an account within minutes. The application process varies by provider, but you typically complete an online application and then wait to learn whether your application is approved.
To comply with the law, a provider may require you to supply:
- Your full name and personal contact information
- Your date of birth and ID number
- Your employment status
Frequently asked questions about forex trading
- Ask price. The lowest price at which a trader can buy a currency.
- At best. An instruction given to a broker to purchase or sell a currency at the best rate currently available in the market.
- Base currency. This is the first currency listed in a currency pair. It shows the value of one currency when measured against another, for example, ZAR/USD.
- Bear market. A market or period in which the prices are falling, which typically encourages investors to sell off a currency.
- Bid price. The price a dealer is willing to buy a base currency at.
- Bull market. A market or period in which the prices are rising, which typically encourages investors to buy securities or commodities.
- Forex. An abbreviation of foreign exchange that refers to the market in which currency is traded.
- Hedging. A strategy that protects an asset or liability from wild fluctuations in exchange rates.
- Leverage. A trader’s ability to control a large amount of money in the forex markets by investing only a small percentage of the overall value of the trade.
- Margin. Cash collateral deposited in case of losses due to foreign exchange trades, or the amount you’re required to spend to open a trade.
- Margin call. A broker’s demand for additional funds to be deposited when your trading account doesn’t hold sufficient funds to maintain all your open positions.
- Spread. The difference between a bid price and an ask price.
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