Forex trading has been gaining a lot of popularity of late in South Africa. It’s very hard to go for a week without hearing a story about some successful trader. The successful traders who have become millionaires overnight from trading Forex, offering courses on how you too can be a Forex millionaire. What exactly is Forex trading and how does it work?
Overview
Forex trading is basically buying and selling currencies. Before we look at what the Forex market is today, we have to understand its origins. It’s difficult to go to another country and use the money from your own country to purchase things. People in Brazil don’t know how much R1 is worth and will not accept it.
To go around this, you would need to exchange your R1 for a Brazilian real. This would allow you to conduct trade within the country in a currency that most people are familiar with.
The most important thing to remember is that currencies are not worth the same, otherwise there would be just one universal currency. Take the difference between the Rand and the Us Dollar, at some point $1 was equal to R6. Today $1 is equal to R16. This means that the rand has gotten weaker in relation to the Dollar.
Businesses use Forex to benefit from the strength and weakness of the Rand in relation to other countries. As a trader you can either buy certain currencies and wait for them to get stronger then exchange them at a later stage or you can trade the fluctuation between different currency pairs through CFD trading.
How does it work?
More than $5 trillion is traded on Forex each day, that squashes stock exchange markets like the JSE, where less than R30 million is traded per day. $5 trillion is a lot of money, it’s more than the entire GDP of Africa. If it were a country, it would be in the top 3; just behind China and USA.
This is why it’s easy to make a few million Rands from this market, there is too much money exchanging hands on a daily basis. What happens is that you speculate how a certain currency will perform in relation to the other. If your predictions are right, you make a profit.
You can buy or short (sell) currencies. Shorting is when you predict that the value of a particular currency will drop in relation to another currency. For example, if you predict that the Euro will lose value in relation to the Australian Dollar and your predictions come true; you will make profit. People who predicted that the Euro will gain strength will lose.
This is a very simplified version of how Forex trading works. There is a lot that goes into analysing and coming up with a solid prediction. You don’t just wake up and predict the strength of a currency pair. A lot of people lose money in forex, that’s because Forex trading is difficult and requires knowledge and patience.
What are the returns?
This is the question that is often on everyone’s mind, “how much money will I make?”. The simple answer is; it depends. Returns for most professional Forex traders range between 1 and 10% per month. Looking at this, how quickly do you think you will reach R1 million.
Most people expect to make returns over 100% per month, that’s not how it works. The reality is that you will likely make returns of 5% per month, that’s if you are a good trader, 3% if you are just average. 5% of R100k is different to 5% of R5k.
Is it worth it?
The sheer volume of the money exchanged daily on Forex should answer you. This is the biggest financial market in the world. Your earning potential is basically unlimited.
The returns on Forex beat any traditional investment, some would say that they rival that of Real Estate or businesses in general. Let’s assume that you constantly grow your account by 5% per month, you would have grown by 60% after 12 months. This means that your account would double roughly every 2 years. Most traditional investments have returns of 2 to 10% per year.
A 10% return on most traditional investments such as bonds, mutual funds, unit trusts is seen as extremely lucrative. Most investments earn just 6% per year. A lot of people lose money because they are trying to get unrealistic returns from Forex. You won’t get a 60% return anywhere else. So, Forex is definitely worth it.
Conclusion
Forex trading is very difficult, it requires a lot of hard work and knowledge. You should be comfortable with making a return of 5% per month. Don’t seek to grow your account by 80%, because you also risk losing that much of your money. Do you have any thoughts or questions? Comment below.
