Over $6 trillion is traded daily on the Foreign exchange market; it’s no wonder that most people are trying to get a piece of this pie. Forex is very complicated and it can be difficult to know exactly what you have to do in order to start trading. This is a step by step guide on how to trade Forex in South Africa.
What is Forex trading
Forex is short for foreign exchange market, which is a global over the counter market for the trading of currencies. It is the world’s most traded market, traded 24 hours a day and 5 days a week. It’s traded by all types of financial institutions like banks and it’s also traded by individual traders.
The value of currencies is constantly changing, it is influenced by a lot of macro-economic factors. The Rand may gain or lose strength when compared to a certain currency on any given period of time.
Your role as a trader
As a Forex trader, you will either be buying and selling currencies or trading the movements of currency pairs. The vast majority of traders do the latter, you can trade Forex using CFDs, what this means is that you basically predict where the market will go and you earn a profit if you are right. This is an extremely simplified explanation but that’s what it is in a nutshell.
Your role as a trader is to buy and sell currency pairs, if you think that the Dollar will gain strength in comparison to the Euro, you buy it and sell the Euro and vice versa. This is known as going long or shorting, if you believe that the US Dollar will lose value, you short it (sell it). You will always be trading currency pairs; this means that you can’t just buy US Dollars and wait for them to gain strength on all currencies. It has to gain strength over a particular currency.
The Dollar may gain strength against another currency while weakening against another. There is a total of 27 currency pairs that are traded in Forex. Some currency pairs are more heavily traded and others are avoided by most traders.
Analysing the markets
Predicting how a currency pair will perform is not a matter of luck. A lot of people tend to trade Forex with a gambling mentality. You have to analyse the markets in order to come to a solid conclusion on how currency pairs will perform.
There are multiple indicators that you can use in order to make a prediction. These indicators are provided by your broker or trading platform. The markets tend to behave in a certain way, knowing how they act makes it easy to predict where they are going.
Most traders employ two common strategies, fundamental analysis and technical analysis.
Fundamental analysis
Fundamental analysis looks at all the external factors that might affect the value of a particular currency. These are things like news, regulations and other things happening at that particular country, things like election results and economic performance may affect the value of a currency.
Technical analysis
Technical analysis focuses on analysing and reading historical behaviour of a currency pair. This helps traders to predict how the pair will behave, the vast majority of traders use technical analysis. Technical analysis includes analysing the green and red charts that you commonly see on movies. As a trader; you will spend a lot of time analysing these charts.
How to get started
Now that you have a brief overview of how Forex trading works, let’s look at how exactly you can get started.
1. Get education
First things first, you need to know how the whole system works. Attending a few seminars presented by your gurus won’t teach you how Forex trading works. Gurus are more passionate about getting people to join their courses, what they will do is just teach you a few basics and their “winning strategy”.
It’s important to learn how the whole system of Forex trading works, there are multiple free resources online. Our favourite resource is BabyPips, it teaches you everything you need to know about Forex trading. Only after you have learned about Forex should you open a trading account.
2. Open a demo account
The next step after getting education is opening a demo account. A demo account will help you practice and see first hand how trading works without risking your real money. Most demo accounts are a reflection of what’s really happening on the markets on any given day. If you are successful at trading with a demo account then you might be ready for a real account.
Most demo accounts come with a deposit of R100 000, this is not real money; you’re supposed to use it to trade on the demo but you can’t withdraw it. Being successful on a demo account doesn’t guarantee that you will be successful when trading on a real account. This is because there are no emotions involved when trading on a demo account. Emotions tend to influence traders when trading on a real account.
You might lose R20 000 on a demo account and not be affected, losing R20 000 on a real account will definitely affect your emotions. Trading with emotions will likely lose you more money.
3. Set a trading strategy
You need a solid strategy to be able to trade Forex successfully and make profits. Traders employ a lot of different strategies; you will likely form your own strategies while trading on the demo account. Losing some money is inevitable in Forex, a strategy should provide you with more wins than losses.
This is when you can start joining Forex groups and paying monthly fees to gurus. That’s if you haven’t figured out a winning strategy. Generally speaking, a good strategy is one that makes you win 55% of the time. Don’t be looking for a strategy that will make you win 90% of the time, they’re hard to come by.
4. Open a trading account
You can open a real trading account if you feel confident enough in your trading abilities. You will need to have at least R1 000, that’s what most brokers require as a minimum deposit. There are a lot of reputable brokers in Forex, choose a broker and open your account. Do thorough research about a broker before opening an account.
There is no shortage of scammers in Forex, read reviews about the broker and make sure the broker has a physical address. It’s often best to use a broker that has been around for at least 10 years.
Deposit some money and start trading!
Conclusion
This was a step by step guide on how to trade Forex in South Africa. Do you have any thoughts or questions? Comment below.
