What is Forex Trading and How Does it Work in South Africa? Take a closer look at everything you need to know about forex, how to trade it, and how forex leverage works.
Are you interested in trading forex with us?
Forex is one of the financial markets that is attracting more and more retail traders and investors, with an average daily trading volume of $ 5,000 billion, and many currency pairs to invest in around the clock. .
Find out about the characteristics and functioning of forex and how to invest in this market through derivatives such as Turbo24, barrier products, options and CFDs.
What is forex?
Forex (Foreign Exchange Market) is an international over-the-counter (OTC) market, where investors trade global currency pairs at a price agreed in advance. It also allows individuals, businesses and central banks to convert funds from one currency to another.
Basically, this market is used to respond to practical situations such as helping companies that need foreign currency to carry out their international business operations, or individuals who need to change their currency before traveling.
The currency market, also known as the foreign exchange market, FX or currency trading, is the largest decentralized financial market in the world. There is no such thing as a currency exchange like there are other markets such as stocks and indices.
The constant fluctuation of the prices of currencies against each other (in pairs) in the financial market has given rise to forex speculation and trading. Due to the colossal amount of currencies converted every day, the prices of some of them can be extremely volatile. It is this volatility that makes the forex market so attractive to investors, as it offers more opportunities to make gains (but it also increases the risk of loss).
What is forex trading?
Forex trading is the activity of taking a position on fluctuations and changes in the prices of currencies. Note that currency exchange transactions are a common activity, practiced every day 24 hours a day globally by different entities such as governments, banks and even individuals.
Forex investors seek to take advantage of rising and falling currency price movements, in order to make gains by buying and selling one currency against another, following an economic or chart analysis.
If, for example, a trader anticipates the rise of the dollar against the euro, he will buy the USD / EUR pair. If, on the other hand, he believes that the dollar will rather fall, the investor will sell this currency pair. He makes a profit if his forecast was correct, and he incurs a loss if he is wrong.
If forex is the most accessible market in the world, be aware that this form of investment is complex, difficult to handle and can lead to both gains and losses.
This is the reason why it is important to learn to control the risks of forex, by opting for a broker offering suitable risk management tools as well as a demo trading platform that will provide access to an environment of simulation where you can test your trading strategies.
Start trading forex today by opening a forex trading demo account on our online trading platform.
Who trades forex?
The most important players in the forex market are:
- Central banks.
- Hedge Funds.
- The states.
- Investment funds.
- Traditional banks.
- Professional investors and private traders.
Why invest in forex?
By choosing a particular market in which to invest, an investor seeks optimal trading conditions and the best chance of making a profit. Thus, most investors prefer the forex market, believing that it meets these criteria better. Here are some characteristics of the forex market:
- The possibility of opening up and down positions using derivative products: with forex, an investor has the possibility of buying at a low price and selling at a high price, or even to sell high and buy low.
- FX market trading hours: the currency market is open 24 hours a day, five days a week, from 10 p.m. Sunday to 11 p.m. Friday (Paris time). These times allow you to take advantage of the different trading hours of active forex sessions, since the currency market is global.
- The exceptional liquidity of the forex market: Forex is the most liquid financial market in the world because transactions can be completed quickly and easily, so transaction fees (or spreads) are often very low.
- Forex volatility: Daily currency trading volume is estimated in billions of dollars traded every minute. Since volatility is a double-edged sword, the market can quickly turn against an investor. Hence the importance of limiting one’s exposure by using risk management tools.
- Leverage to amplify your gains: Leverage allows you to open a position in the currency market by paying only a small part of the total value of the position. Many Forex Brokers offer you the possibility to use trading platform, vanilla barrier products and options and CFDs to invest in forex. These are leveraged products that allow you to gain full exposure while locking in only a small portion of your capital.
- Invest in a Wide Variety of Currency Pairs: This market allows you to invest in a wide variety of over 80 currency pairs, such as major and minor currency pairs, emerging currency pairs, and exotic currency pairs.
- Execute Forex Hedging : There are a variety of hedging strategies that can be used with forex, but one of the most common is hedging with multiple currency pairs. By choosing pairs that are positively correlated (such as GBP / USD and EUR / USD), but opening positions in opposite directions, you can limit your risk.
- Multiple Ways to Invest: Our brokers offer a range of trading platforms available online, apps for mobiles and tablets, as well as advanced platforms for those who want to take trading to the next level. Our partners also offer you fast and intuitive online trading platforms with advanced L2, ProRealTime and MT4 charts and optimized for all types of mobile devices with iOS and Android.
How Forex Trading Works in South Africa
Forex trading is characterized by buying one base currency and simultaneously selling another quote currency. If the various forex operations were previously carried out by brokers, it is now possible to take advantage of price movements thanks to online trading platforms, barrier products and vanilla options and CFDs through online trading. Here are five essential points to remember about how forex trading works:
- Currency pairs on Forex (FX)
- The base currency and the quote currency
- A pip
- A batch
- Margin and leverage
Currency pairs on forex
Forex trading involves buying one unit of the base currency against selling the quote currency, which is why currency prices are always quoted in pairs.
Most brokers classify pairs into the following categories:
- Major Currency Pairs : All contain the US dollar (either as the base currency or as the quote currency). They have the lowest spreads and the highest trading volumes. Some of the major currency pairs include EUR / USD, USD / JPY, GBP / USD, and USD / CHF.
- Minor Currency Pairs : Also known as cross rates or cross pairs, often consist of major currencies with the exception of the US dollar. Among these pairs are EUR / GBP, EUR / CHF and GBP / JPY.
- Exotic currency pairs : consist of a major currency and a minor currency or that of an emerging economy. Among these pairs are the USD / PLN, GBP / MXN and EUR / CZK.
- Regional currency pairs : are classified by geographic regions, such as Scandinavia or Oceania with for example EUR / NOK, AUD / NZD and AUD / SGD.
What is the base currency and the quote currency?
The base currency is the first currency quoted in a forex pair. The second is called the quote currency. Each currency within a pair is designated by a three-letter code, the first two of which designate the country or region (in English), and the last represents the currency. For example, the GBP / USD pair involves the buying of the British pound and the selling of the US dollar.
What is a PIP?
The word pip from English “point in percentage” is the unit of measurement used in the forex market to designate the smallest variation in the quotation of a currency pair, i.e. the fourth decimal (except for forex parities in Japanese yen, for which the pip denotes the second decimal). When the EUR / USD crosses from 1.1000 to 1.1001, it is said to have risen by one pip.
What is a lot?
Lot refers to the unit of value that measures the size of a trading transaction. In other words, the amount of your investment will be larger or smaller depending on the number of lots you trade. On forex, 1 lot corresponds to 100,000 units of the base currency (EUR, USD, GBP…). There are 3 different types of lots: the standard lot, the mini-lot and the micro-lot. The notion of a lot is different depending on whether you are trading a currency pair, a stock market index, a commodity, or a stock.
What is margin and leverage?
Margin, or hedge, is the amount you pay out when you want to open and keep an open position in the stock market. It is released when the transaction is closed.
The leverage effect allows you to benefit from exposure to large amounts of currencies, without having to pay the full value of the position. The leverage effect in forex depends on the derivative you choose to trade. When you buy in forex, barrier products and vanilla options, the initial cost of your transaction is your maximum risk.
How to trade forex in South Africa?
Forex trading is characterized by buying one currency and simultaneously selling another currency. In forex trading, the trader seeks to take advantage of the upward and downward fluctuation of currencies to make money.
With South African forex brokers you can take a forex position with their platforms without any commission by following the following steps:
- Familiarize yourself with how the platform works, barrier products and vanilla options , or CFDs
- Choose a trading strategy that’s right for you
- Start developing your strategy in a risk-free environment with a forex demo account
- Open a real account and deposit funds
- Search for the currency pair of your choice in the search tab
- Choose an amount you want to buy or sell
- Open your position (s)
Previously, the majority of forex trading was done by forex brokers. Now, with the advent of online trading, you can profit from price movements with some leveraged products like options and CFDs. These products allow you to open a position by locking in only a small part of the total capital.
Understand the currency market
The forex market is managed by a global network of banks spread over four major trading centers, covering different time zones: London, New York, Sydney and Tokyo. This market is traded 24 hours a day, because it is not based on a stock exchange unlike trading in stocks and commodities, but on transactions concluded directly between two parties on what is called an over-the-counter market. over-the-counter or OTC (for over-the-counter).
There are three types of forex markets:
- The spot (or spot) foreign exchange market : allows the physical exchange of a currency pair that takes place at the exact moment the transaction is settled or shortly thereafter.
- The forward foreign exchange market : the two parties conclude a purchase or sale contract whose price and quantity of currencies are defined in advance, and which will take place on a date or during a certain period defined in the future.
- The future foreign exchange market : the two parties enter into a purchase or sale contract whose price and quantity of currencies are defined in advance, and which will take place on a specific date in the future. Unlike forwards, a future contract is legally binding.
What influences the forex market?
The forex market, like most financial markets, is primarily influenced by supply and demand from different players such as:
Central banks : the supply of foreign currency is controlled by central banks. Their different measures can therefore have a considerable impact on the price of forex.
The economics : Commercial banks and investors tend to favor healthy economies. Good or bad economic news that affects a certain region of the globe can be the basis for the rise or fall in demand for a currency. Currencies therefore generally reflect the economic health of a region.
Market sentiment : the e market sentiment is often the reaction to the news and can play a major role in currency rates. If investors believe that a currency is going to move in a certain direction, they will position themselves accordingly, which may prompt others to do the same.
Choosing a currency pair to trade
With Forex brokers in South Africa, you can choose to trade over 80 major (such as GBP / USD) or exotic (such as HUF / EUR) currency pairs. You can trade these currency pairs via Barrier Products, Vanilla Options and CFDs.
Here are the steps to follow to trade forex:
- Choose a currency pair to trade.
- Decide whether you want to “buy” or “sell” the chosen currency pair.
- Define your stop and limit orders.
- Open your first position.
- Monitor your forex trading.
- Close your trade and take your gain or loss.
Choose to “sell” or “buy” the selected currency pair
When you trade a currency pair, you buy the base currency and you sell the quote currency. With many forex brokers in South Africa, you can choose to trade over 80 major (such as GBP / USD) or exotic (such as HUF EUR) currency pairs. You can trade these currency pairs via barrier products, vanilla options or CFDs.
Use stop and limit orders
Forex markets are particularly volatile, which is why it is important to have a plan to guide the entry and exit points of your trade. There are different types of stop and limit orders that you can set to manage your risk when trading currencies.
Normal stop orders will automatically close your position if the market moves against you. Note that normal stop orders do not protect against slippage.
Guaranteed stops will always close your positions at exactly the price you specify.
Place your order
If you want to trade forex via Barrier Products, Options or CFDs, you can open a forex trading account in a matter of minutes. Simply open broker’s trading platform, find the currency pair you want to trade in the search bar, enter your position size and choose “buy” or “sell”.
Open a real account and start trading forex with forex brokers. Open, monitor and close your first position
Once you have opened your position, you can monitor your forex trading gain or loss in the “open positions” section of our online trading platform.
Forex Trading FAQ
Before you start trading, you need to make sure that you have sufficient funds. Unlike trading on the stock market, there is no imposed minimum. This means that you can tailor your required capital to suit your goals and the way you trade. However, it is generally considered that an investor should not risk more than 1% of the total value of his account in a single position. For example, if your account balance is $ 10,000, it would be a good idea not to allocate more than $ 100 to a single position.
After defining the capital you want to invest, you need to prepare your forex trading plan. It should include the following information: when you want to exit the market, how much time you are willing to spend trading, your research regarding the pair you are interested in, your risk management strategy and your trading strategy. .
Whether you are new to trading or already have some experience in other markets, the characteristic volatility of the forex market makes it a complex environment that cannot be understood immediately. However, by developing your trading knowledge, establishing a solid forex trading strategy and deepening your experience, it can become an accessible market.
A forex trading strategy should take into account how you trade, which depends on your goals and how much time you can devote to trading. For example, day trading involves opening and closing positions during the same trading day in order to profit from small movements in the price of a currency pair. At the other end of the spectrum is position trading, which involves holding positions for a longer period in order to take advantage of large price movements. To be successful, these two strategies involve different techniques and time commitment.
The forex market is an extremely volatile market by nature. A currency pair that moves a lot for one week can then be very calm the following week. Most of the trading volume is gathered around a handful of currency pairs, including EUR / USD, USD / JPY, GBP / USD, AUD / USD, and USD / CHF. Being very volatile, it is these pairs that attract the most investors.