Forex trading is one of the most popular methods used by traders to generate consistent profits in the international currency market. The following article presents a detailed view of Forex trading in South Africa, along with certain facts that investors need to know before they dive into the world of forex trading.
What is Forex Trading?
The foreign exchange market is considered as one of the most lucrative markets that traders have access to. It deals with the buying and selling of different international currencies on the international market. Forex markets differ from other markets as there is no central marketplace or entity that controls the market. Instead, currency markets are affected by a variety of different factors such as different geo-political events, changes in any national government regulations and other economic considerations.
Forex trading has been traditionally in the hands of large-scale investors who deal mainly in the spot market, forwards market and the futures market. However, due to recent technological advancements, a class of electronic trading platforms and online forex brokers have emerged. As a result, the spot market has seen an influx of individual speculators and investors, some of whom have amassed fortunes by taking the right trading decisions.
Why People choose Forex Trading?
Apart from Forex trading, stock trading and commodities trading are the two important markets that are traded daily on a large scale. However, the Forex market by far has the largest daily trading volume of all the markets. Traders prefer the forex market because of a series of unique advantages it has over other markets. Below are some of the reasons why traders overwhelmingly choose the forex market.
- High Liquidity: In layman’s terms, this is the ability of an asset to be quickly converted into cash. The forex market involves the movement of large amounts of money, into and out of currencies. They generally have small spreads, which is the difference between the asking price of potential sellers from the bid price of potential buyers.
- Active 24/7: The Forex market is worldwide in nature and trading is done continuously. This gives traders the chance to enter multiple markets for better trading opportunities.
- Low transaction costs: The cost of a transaction in the forex market is included into the price of the currency in the form of spread. The spread acts as payment for Forex brokers as payment for facilitating the trades. Spreads are measured in “pips”, which is 1/100 of a percent for most currencies.
- Using leverage: Traders can use significant amounts of leverage when buying and selling currencies in the market. This gives them a greater ability to trade amounts which are greater than the trader’s own account. For instance, if a trader uses 50:1 leverage, it means he/she can trade $50 for every dollar that’s in the trader’s account.
- Profit Potential Due to Volatility: Since the forex market has directional trading or restrictions, it is very volatile in nature. This gives traders the opportunity to earn huge gains if they make the correct decisions at the right time. However, volatility can also act as a double-edged sword, causing traders to lose substantially more.
Forex Trading in South Africa
The growth of Forex trading in South Africa has been evident in the last five years, with online brokerage sites and other platforms providing accessibility to a growing number of individual traders. The forex market in South Africa is mainly regulated by the Financial Services Board or FSB.
Digital trading platforms and brokerages have made it easier for South Africans to make short- and long-term investments in the market or speculate on the volatile nature of the currencies. According to a report from the Bank of international settlements in 2017, South Africa accounted for the largest share of trading volume, followed only by Nigeria, making it the largest market in the continent of Africa.
Forex Trading Options for South Africans
The South African Forex market has been growing due to a number of different factors. Stricter regulations in Europe have forced international brokerage companies to focus on newer markets such as those in Africa. South Africa, which has a strong regulatory framework enforced by the country’s independent regulator, the FSCA has many international brokerage sites operating.
Below are some of the trading options South Africans can access.
- Spot FX or Retail FX: Spot FX refers to an agreement which involves the buying and selling of one currency against another currency. This takes place on the spot or instantaneously. It differs from currency derivatives as both delivery and payments are instant. The holder of the buy currency may sell it for a profit in the future if the currency value rises.
Currency value changes are measured in “pips” in the Spot FX market, which represents a percent of a percentage change in value. For instance, a change in the spot price of a currency from 50.5655 to 50.56569 is equivalent to a single pip. When trading currencies in pairs, the change in pips, multiplied by the currency’s’ value, gives us the profit.
- Currency Derivatives or CDs: Investors can also use a range of instruments provided by the JSE to trade in the forex market. Derivative instruments refer to financial contracts which have values directly linked to the value of a real-world asset. In case of a currency derivative, its value is derived from the underlying currency or currencies. Both organizations and individuals can use currency derivatives in different ways. Investors and traders use CDs for portfolio diversification or for gaining profits through market speculation.
- In South Africa, a range of currency derivatives are available for on exchange trading. The Johannesburg Stock exchange has the Rand paired against the pound, the Australian Dollar, the US Dollar, the Japanese Yen and a host of other major national currencies. Transactions are required to be cash settled, as no physical exchange of foreign currency takes place.
The Johannesburg Stock Exchange offers three types of derivatives, namely, currency futures, currency options and currency Quanto futures.
How to Legally Trade Forex in South Africa?
- For Forex Derivatives: South African citizens can legally access forex derivatives through a JSE registered broker which is in compliance with all the regulations. The broker connects the Stock exchange with the trader, acting as a gateway. Traders can choose from a range of brokers, depending on individual trading or investment style. A full list of JSE regulated brokers can be found at the JSE’s official website.
- For Spot FX: Spot FX trading can be accessed easily through legally compliant South African Forex brokers. They are regulated either by the FSCA, or any major foreign regulatory body such as the Financial Conduct Authority of the U.K. South Africans can check a broker’s credentials and verify them, using the FSCA website’s FSP search. When it comes to the safety and transparency of a trader’s fund, regulatory compliance is a priority.
What to look out for as an investor in the South African Forex market
Due to the competitive nature of the online forex market, it is filled with online brokerage sites, some of which may not be legitimate. Past instances of frauds and scams have made it necessary for traders to conduct due diligence before working with any particular trader. In the following sections, some factors are listed which traders should consider before diving into the forex market.
- Scams and Frauds: There has been a number of cases recently where South Africans have fallen prey to elaborate scams involving forex and cryptocurrencies. Gullible investors are at risk due to the digitization of the entire trade life cycle. There are many unlicensed brokers operating in the market. They often advertise through various social media channels, promising huge, almost unreal amounts of returns, if one invests with them. Adverts like these should be considered as a red flag and avoided at all costs.
- Using leverage: As mentioned above, leverage can act both ways and possess as the main risk when trading in forex. For instance, for a trade valued at R 300,000, a trader trading with 300x leverage on offer can access it by making a small deposit of R 1000. While this can increase the profit potential manifold, traders can get negatively affected as well, especially if they are not careful. Traders should consider using less than 1:20 leverage. They should also formulate an effective risk management plan to reduce any future risks.
- Security: Any reputable broker must have a high level of security, usually in the form of regulatory compliance with an international body. Brokers in South Africa should hence be regulated by the FSCA, or any tier one international institution such as the Investment Information Regulatory Organization of Canada, Autorité des Marchés Financiers in France, Bundesanstalt für Finanzdienstleistungsaufsicht in Germany, Swiss Federal Banking Commission for Switzerland, the Australian Securities and Investment Commission, Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) in the United Kingdom and the National Futures Association (NFA) and Commodity Futures Trading Commission.
- Deposit and Withdrawal Options: Reputed brokers always have deposits and withdrawal procedures that are user-friendly and non-confusing in nature. Brokers posing hurdles or making it hard for the trader to withdraw his/her own funds should definitely be considered as a red flag. Often such brokers end up being fraudulent schemes to trap investor funds.
- Trading Platform: Since trading platforms help traders to trade forex online, the nature of the platform matters. The platform one chooses should be user-friendly in nature, with clear controls for executing trades as one wish. Additional features such as easy to use technical and charting tools, as well as a free news feed should always be preferred.
- Customer Service: Brokers are required to be customer-centric and a good customer service team is reflective of a broker’s legitimacy. Reputed brokers have skilled customer service teams, usually functioning 24/7 to aid their clients, answering queries or helping them tackle any issues that may arise while trading. It should have a clear and definite email or a chat service, where replies should be instantaneous.
Good Practices to Follow for Forex Traders in South Africa
Traders should take precautions to protect themselves from dangerous or illegitimate forex brokers. There are a few good practices one can follow to make sure they don’t fall victim to elaborate scams or frauds.
- Comparing price feeds: Being fixated on a single broker’s price feed is never a good idea. As a trader, one has to be fully aware of the whole forex market including price feeds on other platforms. Focusing on a single trading platform is like trading with blinders on. Brokers carrying on dishonest practices can easily widen spreads, run stops, and manipulate rates without the knowledge of the trader before it’s too late. Subscribing to multiple price feeds would alert traders if an anomaly is detected in one of them.
- Recording Details: Another good practice is to keep a detailed journal of all transactions to safeguard against any future issues. Screenshots should be taken for each order placed as well as each trade executed. Anomalies such as odd price feeds should also be documented.
The forex market along with the commodities and stock markets have always been a market of opportunity for traders. The enormous surge of forex trading in South Africa has seen a significant rise in the number of active traders in the country. An individual with the right skill set, knowledge and understanding of the forex market would attain major success as a trader. However, uninformed decisions may affect a trader’s fund negatively. Traders also have to be on the lookout for fraudulent brokerages and protect their funds.
Luckily there are many legitimate Forex brokerage sites in South Africa, offering high-quality forex trading with security and guarantees. Most of them are even regulated by a major regulatory body such as the FSCA. A quick market search would yield the best brokers for forex trading in South Africa.