Forex trading is a popular form of short-time investment and a source of additional or main income for many people all over the world. Forex trading is available in South Africa, but many potential traders just do not know how to make the first steps in this field. This full beginner’s guide explains the base of Forex and its key terms.
What is Forex Trading?
Forex trading, also known as Forex Exchange, or FX Trading, is a process of buying and selling one currency for another. Since the Forex market is open, the price of every currency fluctuates to its peers. A trader can buy one currency for another, sell back when the price changes, and make a profit. Every day millions of large and small traders globally open deals on the market, and South African traders are among them.
How Does the Forex Market Work in South Africa?
In South Africa, the Forex market works as in many other countries but with some local specifics. In general, it works like this:
- a person decides to become a trader in South Africa;
- then he or she chooses the brokerage – a proxy between a trader and financial market;
- a new trader opens an account with a chosen broker;
- a trader deposits some money to the account;
- a trader makes the first trades;
- a trader closes a trade with profit or loss.
One of the frequent questions is why an individual trader should choose a broker without entering the Forex market directly. To enter the global financial market for currency speculations, a person should make some juridical preparation, get approval from market regulators, and enter the market with a deposit of 7 digits. Most retail traders cannot afford this. That’s why they address brokers and use leverage trading.
This rule is correct for Forex trading in any country, and it also helps to start trading in South Africa. Let us focus on some local specifics.
Advantages of Forex Trading in South Africa
Forex trading in South Africa has some convincing advantages: legal status, low entry threshold, and ZAR account at local brokerages.
Forex trading is absolutely legal in South Africa. Unlike in other countries, residents of South Africa can legally trade and withdraw their profits. The only issue a trader should remember in South Africa is that a profit from Forex trading is taxable, so it is necessary to calculate and pay taxes.
Low Entry Threshold
To start Forex trading in South Africa, a newcomer needs a computer or smartphone connected to the Internet and some money. The minimum amount to start Forex trading in South Africa is $100, for example, JustMarkets offers a Cent Account. So, it is easy to enter this field in South Africa.
To avoid the exchange commissions, a local resident can open an account in Rand (ZAR), or on one of the major currencies.
Disadvantages of Forex Trading in South Africa
There are two main local disadvantages: lack of market regulation and a time zone.
While Forex trading is a business with great profit potential, there are always some scammers who want to withdraw money from a trader’s account and never pay back. To avoid scammers, always check whether a broker is regulated with FSCA - Financial Sector Conduct Authority or not. This organization works for a healthy trading and competitive financial marketplace.
Forex market works 24\5, excluding weekends and major national holidays. However, the peaks of activity occur on this market when one of the major exchanges opens: Tokyo, London, and New York. When Tokyo opens, it is a deep night in South Africa, and when London and New York open, there are business hours, and many people are at work. Forex trading can be time-consuming, so it is hard to combine the full-time job and Forex trading in South Africa.
Tips for Beginner Forex Traders in South Africa
We can share some useful tips to make the start in the Forex market in South Africa easier.
- Remember that the Forex market is risky and volatile, you can lose your money, so always be careful;
- Try to improve your trading skills using a Demo account;
- Read, watch, and listen about Forex to learn more;
- Develop your own trading strategy and follow it;
- Find a good, reputable broker to protect your money.
How Much Does It Cost to Learn Forex Trading in South Africa?
Many new traders want to learn about the Forex market, its rules and laws, and the art of trading, to get a competitive benefit on trades. There are several ways to get knowledge about trading, and some of them are free of charge. Let us discuss some options to learn Forex.
A young trader can get the first lessons about Forex by just having access to the Internet. It is enough to open Google or other search sites and type something like "First steps on Forex". Numerous Youtube channels, screen casts, video lessons, ebooks, and other sources are for your service. Of course, most of them are too surface, but in the beginning you do not need to go deep. Find the source of your choice and spend some time to get the basics.
Learning Courses by Broker Companies
All retail Forex broker companies want to attract and engage new traders. One of the most honest and effective ways to do this is the offer of a learning course. Most of them are free. The brokers offer free webinars, separate lessons, and learning courses, glossaries, Demo and Cent Accounts. JustMarkets offers Cent Accounts to allow beginners practicing their trading skills without significant losses.
Accredited Learning Courses
Some specialized schools, universities, and learning centers provide accredited Forex learning courses. Course price and duration depend on the schedule and course selection: as a rule, these schools offer a free introductory lecture and several packages - basic, extended, and professional. A course length can vary from two weeks and until the student is ready to start trading. A price range varies from $100 for the basic course and $1500 for the individualized custom course.
For a beginner, a free learning course from a brokerage should be enough for a successful start. On the Forex market, nobody cares about the accredited diploma: a set of hard and soft skills and a personality are more important.
Important Forex Trading Terms in South Africa
Pip stands for "Point in percentage". It is a standard unit that measures price changes. Pip is equal to ten points.
What is the Margin in Forex?
The difference between buy price and sell price is measured in points and pips.
Asset: Currency Pairs for South Africa
An asset is a financial tool you use to make money on the financial market. The assets are the following: currency pairs, stock, options, derivatives, and so on.
While we speak about Forex trading, a major asset is currency pairs. There are 7 major currency pairs:
- EUR/USD (Euro/United States dollar) – the most traded pair;
- USD/JPY (United States dollar/Japanese yen);
- GBP/USD (Great British Pound/United States dollar);
- AUD/USD (Australian dollar/United States dollar);
- USD/CAD (United States dollar/Canadian dollar);
- USD/CHF (United States dollar/Swiss franc);
- NZD/USD (New Zealand dollar/United States dollar).
Some brokers also offer currency pairs with RAND, like ZAR/USD.
Price: Forex Quotes
Forex quote is the price of one currency in terms of another currency. For example, $1USD = EUR1.25 is a Forex quote. A trader should track the quotes to define trends, support and resistance levels, and open the trades.
Trade Size: Lots, Mini Lots, Micro Lots and Nano Lots
Trade size in the Forex market means the transaction volume, or a number of lots for one deal. Here is the size of various lot types.
- Mini LOT (also referred as 0.1 lot) - 10,000 units of any given currency;
- Micro LOT (also referred as 0.01 lot) - 1.000 units of any given currency;
- Nano LOT (also referred as 0.001 lot) - 100 units of any given currency.
Leverage: Amplifying Exposure But Increasing Risk
Leverage is a type of credit that a broker can provide to its client. As a rule, retail Forex traders do not have enough money to open a large position and make significant money. However, you cannot earn as much with a small investment at the start. So, a broker provides a leverage to multiple a deposit and earn a higher profit.
Understand the Risks of Forex Trading
Every time you start a new business, you risk it. A risk is a core of business: despite the nature of the business, an owner can face unfavorable circumstances and losses. There is an unwritten rule of the market: to get a great profit from the business, it is necessary to face a high risk. A risk level and potential profit are directly linked. The calm business can bring, say, 2-5% of profit annually. In the Forex market, the average profitability is 40%. It is clear that the higher profit on Forex means the risk is also higher.
The root of the high-risk nature of Forex trading is in the market volatility. Simply speaking, fundamental and technical analysis can define market trends, support and resistance levels, and other price movements. However, no one can predict all the market fluctuations because numerous factors of impact can change the situation at any moment.
Any trader starting Forex trading should recognize the fact that each deal (trade) can finish with a loss. A trader can plan trading activities and make a financial plan, but at any moment, the market situation can change and a plan can fail.
So, JustMarkets recommends you deposit an amount of money you can afford to lose. Never use the last money of your family for Forex trading. So not use credits to trade. On the high-risk volatile market, you can lose it with no chance to return because a broker is not responsible for this aspect of trading.
What is a Forex Trading Platform?
A Forex trading platform is a specialized software to buy and sell currencies on the financial market. It can be a downloadable program, web application, mobile application, or combination of these three. A broker uses one of the available Forex trading platforms in South Africa to let its clients trade.
Which is the Best Forex Trading Platform?
There is no commonly accepted answer to this question. The market for trading software is huge and new solutions appear day by day. Let us focus on the most frequently used solutions.
One of the most popular platforms in the Forex market, MetaTrader 4 is a free open-source solution for trading. Its strong sides are a traders’ community and several free and paid add-ons.
It is not an update for MetaTrader 4; MetaTrader 5 is also a modern and popular solution that allows trading with stocks, not only currencies. From a technical point of view, MT5 is 64-bit software, while MT4 is 32-bit.
This trading platform is relatively new, it is easy to use, and it offers dozens of useful functions, including learning videos. Also, the platform promises to protect its clients from scams.
Other Forex Trading Platforms
Some brokers offer other custom trading platforms, including eToro. However, its market share is minor.
What Changes Forex Prices?
The price of every currency in the Forex market depends on several factors. First, it is national monetary policy and national central banks. The second factor is the national economy: fast or slow growth, stagnation, collapse, and other phases of the economic cycle. The next, third factor is the Forex market itself with its rules and laws.
It is impossible to separate the impact of each factor in the Forex market: like an ocean, it reacts to all winds, and only the combination of these factors can show the upper-level view on the market.
Central Bank Economic Policy
The central bank of every country regulates national monetary politics. Certainly, the most famous and important Central Bank of the world is the Federal Reserve of the United States or just Fed. The reason is that the USD remains the leading currency in the world, and the cost of every national currency can be measured by price in US dollars. Another important central bank is the European Central Bank, or ECD, which regulates monetary policy in the Eurozone. Some traders also follow the national banks of the United Kingdom, Japan, Canada, Australia, and other countries.
Base Interest Rate
Each central bank sets a base interest rate – it means the price of credits for commercial banks. Commercial banks take credits to finance various business activities, including the credits for corporations and entrepreneurs. In general, the base interest rate defines how easy it is to get credit in a country.
A low-interest base means "cheap money" – businesses can take credit with minimal threshold, but cheap credit means high inflation and price growth. Vice versa, a high base interest rate means "expensive money", which holds inflation back as well as economic development. Each bank reviews a base interest rate on schedule, and each change results in fluctuation in the Forex market.
A national central bank can regulate the price of the national currency with trades in the Forex market. For example, the Bank of Japan is known for its so-called interventions. Japanese economic growth makes the yen expensive, as well as national goods and services. To make it cheaper, the Japanese national bank intervenes in a market and sells yen to decrease its rate. Also, a national bank can regulate the price of the national currency with other methods, including changing the money aggregates (a number of currency in circulation) or keeping it away from the Forex market. Thus, the Chinese government does not allow Forex retail for yuan and restrains its price artificially.
All major events in leading national central banks provoke volatility in the Forex market, so a trader is advised to follow the calendar and keep the monetary policy in mind.
Fundamental analysis means the analysis of the deep economic factors, processes, and overall state of the economy that underlies market events, as well as minor factors that can also impact the market. Central bank monetary politics is the factor the fundamental analysis takes into attention. Other factors are production, employment, manufacturing, housing, and earnings.
A trader can use the elements of fundamental analysis to predict long-term trends and trade profitably. For example, the government agencies in different countries issue the economic reports by schedule. A trader can analyze the economic situation in the country, make a forecast and open a trade position shortly before the important economic report, like the unemployment report. The growing unemployment level means the economic development in the country is below expectations, and the national currency price goes down.
Corporate reports are also a factor of fundamental analysis. If the large corporation reports high profits, it means a healthy economy, growing production, and strong national currency. In the day when the report is published the price of the national currency can significantly fluctuate. For example, Boeing reports higher profits in H2 2021 compared to the previous year. The news meets market expectations, and the market responds with the USD growing price.
Knowledge of fundamental analysis and its key factors can help a trader to open well-weighted positions and make a good profit.
A technical analysis aims to identify the trading opportunities using so-called technical indicators: past market activity, existing trends, patterns, indicators, entry signals, and trading volumes. In practice, it means, for example, that a trader can ignore the market volatility if a trading volume is small because after a quick storm the market will return to the strong trends.
Technical analysts often work for broker companies and publish their analyses and forecasts daily. These publications help traders to leverage certain techniques and get more profits. Technical analysis is a complex skill, but basic terms and principles are available for any trader.
Forex trading is not easy. However, a trader can make a good profit with Forex trading in South Africa. A new trader should follow some simple rules to start Forex trading in South Africa. Always choose a good reliable broker, follow your trading strategy, try to learn more about the Forex market every minute, and remember that Forex is a volatile market and nobody has absolute protection from a loss.
How is the Forex market regulated in South Africa?
The Forex market in South Africa is regulated with FSCA – Financial Sector Conduct Authority. This organization aims to provide healthy trading and a safe environment for Johannesburg currency exchange, insurance companies, finance companies, and so on.
Is Forex Trading Legal in South Africa?
Yes, Forex trading is absolutely legal in South Africa. There are no limitations and regulations that forbid Forex trading for local residents.
Is Forex Trading Taxable Income in South Africa?
Absolutely. Your income from Forex trading is taxable even if you earn with the offshore broker.