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How to trade Forex in South Africa: Introduction to Currency Trading

How to trade Forex
Foreign exchange trading in South Africa is one of the most popular ways for online investments along with commodity, index, stock, and cryptocurrency trading. Millions of traders wonder how to trade Forex and invest in currencies daily, creating an incredible Forex trading volume on the market. A variety of Forex pairs allows retail traders to pursue diverse opportunities and chase their financial goals with major, minor, and exotic currency pairs. Even though the most popular currency pair is EUR/USD, investors do not limit themselves from adding other currencies to their portfolios.

The Forex market is liquid since thousands of transactions are performed daily. Today it is so convenient to trade currency pairs. FX trading does not require a centralized location, and every deal can be done in a virtual environment with the help of a broker. While the market is working 24/5, foreign exchange trading is almost non-stop. Beginners and seasoned traders access the market online to reach major financial exchanges in New York, London, Paris, Hong Kong, or Tokyo and make their way to meet the desired investment objectives.

TABLE OF CONTENTS

1. Introduction to Forex Trading in South Africa
2. A Brief History Of Forex
3. What is Forex trading in South Africa?
4. What currencies can I choose for trading?
5. How do I start trading Forex?
6. How To Get Started With Forex Trading in South Africa: 6 Steps
7. Should You Trade the Forex Markets?
8. What are some of the factors that affect Forex prices?
9. Do I need a strategy for trading Forex?
10. What can help to craft trading strategies?
11. Understanding Time Zones in forex
12. Speed up your Forex trading with PrimeFin
13. Summary
14. FAQ

Introduction to Forex Trading in South Africa

The foreign exchange market or forex is an exchange of currencies between parties who agree to the exchange rate. Forex traders usually meet at the forex market because it's currently the most liquid and active market in the world. But what exactly is forex trading? This is the process of changing one currency into another with the intention of making a profit. In order to become a successful forex trader, you will need to develop your trading skills, market analysis skills, risk management skills, as well as other skills through practice and experience.

A Brief History Of Forex

The history of the forex market is one that goes back as far as the barter system in ancient Mesopotamia. This was the accepted means of exchange until a more standardized means came into play, Gold. Gold became the accepted currency of exchange for a long time until the advent of paper money. About 500 years ago, Amsterdam was the first city to start a Forex market.

Read also: How to invest in a gold in South Africa

After World War II, the United States, Great Britain, and France met at Bretton Woods, New Hampshire, to design a new economic order. The Bretton Woods System was the first major reform to occur on the foreign exchange market. The Smithsonian Agreement, which came after the Bretton Woods Accord in December of 1971, was very similar to the Bretton Woods Accord, but it allowed for a wider range of exchange rates for currencies. The US Dollar was pegged to gold under the Smithsonian agreement, and other major currencies were allowed to fluctuate by 2.25% against it.

Another significant change was the establishment of the euro by the European Union. Money and the way people use it - and how they view it - changed in the 1990s, making the currency markets more sophisticated and more dynamic than ever before. Emerging markets began to grow which attracted more capital to these emerging economies and thus a need to trade with their currencies. Gradually retail traders were allowed into the fray and the forex market evolved into what it is now.

What is Forex trading in South Africa?

The foreign exchange market offers to trade one currency for another at an exchange rate. Currency trading is an essential part of the financial world. We sell and buy goods and services from different countries, and therefore we need to exchange money. If the U.S. businessman wants to buy wine from Spain, he needs to pay for it in euros instead of dollars. So, he performs a Forex trade with the EUR/USD currency pair to get the product he wants.

People can also trade currency pairs to preserve their wealth. For example, the Russian ruble is much cheaper than the U.S. dollar. Plus, Russia's economic situation is unstable because of sanctions imposed by the many leading countries due to Russian political and military aggression towards different countries. Thus, a Russian citizen can trade rubles for dollars to preserve his capital in a more stable currency.

To understand how to trade Forex, it is crucial to learn Forex terminology. So, here are some of the important terms for novice traders:

  • Base currency is the first unit in the pair that shows how much of the second currency (quote currency) is required to buy or sell this one. Since Forex assets are traded one against another, currency units always come in pairs. For example, in the EUR/USD pair, the euro is the base one. 
  • Quote currency is the second unit in the Forex pair. It represents how much it costs to buy or sell the base currency. When trading the EUR/USD pair, the dollar is the quote currency. 
  • Bid price represents the highest amount of money a Forex trader is asked to pay to buy an asset.
Buyers and sellers negotiate a bid price to agree on the amount that will suit both parties. 

  • Ask price (selling price) is the minimum amount of money a seller is ready to pay for a currency. 
  • Spread represents the gap between the bid and ask prices and serves as a commission that traders usually pay to a Forex broker for services provided. It is also an indicator of the liquidity of selected assets on the market. A low bid-ask spread in Forex trading means better liquidity. 
  • Pip (price interest point or percentage in point) is the smallest indicator of price movements. It is a basic unit for each trade. A pip is the last decimal in the currency pair quotation (0.0001). There is also a pipette (an extra decimal point), which shows even smaller price changes in a Forex pair. It is used for more accurate quotes.
Currencies can be exchanged on the spot market. Such trading implies immediate physical delivery of assets. However, there are also forward and futures markets where retail traders deal with underlying currencies.

What currencies can I choose for trading?

With many currencies existing in the world, Forex traders may find it difficult to choose the currency pair suitable for their financial goals. Depending on strategies, investors can choose major, minor, or exotic currency pairs. Based on a chosen pair, the course of trading may take different turns.

Major currency pairs are actively traded, liquid, and have the lowest spreads. They are the choice of the majority of Forex traders. Because of the high liquidity on Forex markets, buyers and sellers can always find each other to perform a trade. Such pairs always include the U.S. dollar and another currency of a developed country.

Some of the examples of major currency pairs in Forex trading are:
  • EUR/USD (euro/U.S. dollar)
  • GBP/USD (pound/U.S. dollar)
  • USD/CAD (U.S. dollar/Canadian dollar)
  • USD/JPY (U.S. dollar/Japanese yen)
  • USD/CHF (U.S. dollar/Swiss franc)
  • ZAR/USD (U.S. dollar/South African Rand)
Minor currency pairs are less liquid, have higher spreads. However, they are still popular among traders. Those are also called cross-currency pairs and are assembled in pairs with major currencies apart from the USD.

Some of the examples of major pairs are:
  • CHF/JPY (Swiss franc/Japanese yen)
  • GBP/EUR (pound/euro)
  • AUD/JPY (Australian dollar/Japanese yen)
  • EUR/JPY (euro/Japanese yen)
  • GBP/CAD (pound/Canadian dollar)
Exotic currency pairs include the money of developing countries and some major currencies. Some currencies can be very liquid, and some of them can have very low liquidity. Usually, those have the highest spreads. It can also be problematic to find a trader who wants to perform a transaction with an exotic currency pair.

Some of the examples of exotic pairs are:
  • GBP/ZAR (pound/ South African rand)
  • EUR/TRY (euro/Turkish lira)
  • EUR/RUB (euro/Russian ruble)
  • AUD/MXN (Australian dollar/Mexican peso)
  • EUR/PLN (euro/Polish zloty)

How do I start trading Forex?

One of the common ways to trade Forex is contracts for difference (CFDs). Those are the type of financial contracts when two parties (a buyer and a seller) agree to trade underlying currency pairs by speculating on their price movements' trajectory. A trader opens a position with an entry price and leaves this position with a closing price. The difference between these two Forex prices can be a potential profit.

In contrast to exchanging actual fiat money or investing in stocks or bonds, CFD traders do not need to hold a tangible asset. Forex trading via CFDs implies that underlying currencies derive their prices from physical assets. CFD Forex trading is performed on the over-the-counter market. It is a network of multiple brokers that manage trades and set currency prices according to supply and demand. Any CFD trade is settled in cash.

The example of Forex trading via CFDs is as follows:

1. A trader finds a broker, offering CFDs on currency pairs, downloads a trading platform, opens a trading account, and makes a deposit.

2. The trader chooses a preferred currency pair and enters a position by buying a contract at a current price.

3. The trader can predict the direction of price fluctuations of a selected currency pair to open a position. He can go either short or long.

4. To get a potential profit in Forex trading, the trader should make a correct prediction on price movements. However, if the prediction turns out to be wrong, he loses his invested capital.

Traders prefer CFDs since these contracts do not have an expiry date, allow crafting short-term and long-term trading strategies, give the possibility to go short and long. Forex CFDs also involve leverage, which makes trading accessible. It increases buying potential by boosting the market exposure. However, leverage also implies a high risk of losing money. So, both potential profits and losses can be magnified. Considering that prices on the Forex market are volatile, the risk of increased losses is a critical point that should be included in trading strategies.

The conditions in terms of the leverage size available for Forex traders vary from one broker to another. It also depends on an asset price. The leverage is shown as ratios. For example, 1:2, 1:10, 1:30, 1:50, 1:100, 1:200, etc. When trading Forex CFDs, a trader does not pay the full price for the underlying asset thanks to leverage. He can make an initial investment, which is just a fraction of the trading lot’s total cost. A broker finances a trading account with the rest of the price. Forex CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

How To Get Started With Forex Trading in South Africa: 6 Steps

Trading the forex market is not an easy task, and for beginners, it could seem overwhelming. Rather than getting lost in this wide world of forex trading, here are 6 steps to help you find your footing in the forex market.

1. Understand the fundamentals of forex trading.

The Forex market can appear complicated at first glance. The reason is that there are many new terms related to trading operations and strategies. If you are planning to trade forex, you should familiarize yourself with the forex language and all the terms you will encounter before opening your account and selecting your broker. If nothing else, you should know what leverage, pips, and risk management are, as well as what brokers execute and how spreads are calculated.

2. Begin to monitor the markets.

After learning the basics, one thing you need to do is to begin to monitor the markets. In doing this you will learn the various currency pairs and also begin to observe patterns in the market. Trading in forex involves trading a currency pair. When looking for patterns, depending on the time frame, you might have to analyse months or even years' worth of charts before you can identify basic patterns like breakouts, trends, and ranges.

3. Develop a strategy based on what you hope to gain from the market.

You should know that forex trading isn't a get-rich-quick scheme or a magical market that produces sudden profits without losses.

The best way to maximise the market is by setting realistic goals that take your position and your capital into account. To find out which currency pairs, technical indicators, time frames, and risk management strategies mesh with your trading personality and resources, experiment with various pairs, indicators, time frames, and strategies. You can build your own trading system once you determine the factors that give you more wins than losses.

4. Select a Broker

In order to be successful trading forex, you need to choose a reliable forex broker. Before selecting a forex broker, you should be aware of several things. You should choose a regulated broker whose website contains clear contact details such as their telephone number, email address, and headquarters address. Make sure you can reach customer service through email or live chat. Check out their trading platforms, such as mobile apps, web-based options, or both. Find out what trading instruments they offer. Conduct as much primary research as you can before picking a broker.

5. Begin trading on a demo account.

Using historical charts of the currencies you want to trade, you can analyze the market and practice with a demo account. Demo trading provides you with an opportunity to test your trading system's profitability, as well as to hone your skills without having to worry about making profits.

6. Monitor your progress.

Getting to this point is the most difficult, but vital step. The consistency of your profit-making system is built here. You can measure the effectiveness of your system and the effectiveness of its implementation by establishing goals, targets, and performance metrics. At this point, it is highly recommended to keep a trading journal since it reveals what factors work and which do not. Practicing deliberately further accelerates the process.

Should You Trade the Forex Markets?

Many people are interested in trading the forex market because they feel it is a platform to amass wealth in a short period of time. While it is possible to get lucky on the forex market, this does not occur often. In time many people get frustrated and quit. Recent analysis shows that 82% of retail traders are not profitable on the forex market.

If you notice any of these four things, you should not start trading at all.

  1. You do not have a sustainable means of income. While many people jump into trading as a means to earn, having a stable source of income is a major way to keep your balance when you start trading.
  2. You cannot handle when you are wrong. In trading forex, no expert is right 100% of the time. There are times the market would invariably move against you, and this happens to experienced traders too.
  3. You do not like to take risks. The forex market is a highly volatile one, and money moves fast. If you are a person that is risk averse, the forex market is not for you.
  4. You are too busy. Mastering Forex takes time. If you find that you are too busy to learn about how the market works, and how to trade, then you should not bother entering into the market.

What are some of the factors that affect Forex prices?

To figure out how to trade Forex CFDs and make predictions on the future direction of asset price movements, investors need to know what factors affect prices of currencies and, consequently, exchange rates. Those are crucial points that show the level of investments in a country and globally. A trader pays careful attention to an exchange rate of a preferred currency pair to analyze the market behavior and adjust a trading strategy accordingly.

1. Political and economic stability

Currency strength is determined by political and economic events in a country. If there are no political uncertainties or economic turmoil, a currency is considered to be stable. Thus, a trader may choose this currency for his trading plan. A Forex pair with such assets as the U.S. dollar, euro, Australian dollar, Japanese yen, or other currencies of developed countries are the most attractive options for a trading portfolio.

However, countries with unstable political and economic situations may experience depreciation in the value of their fiat money. Traders may not want to risk and can avoid investing in currency pairs of developing countries.

2. Inflation rates

Inflation may cause considerable fluctuations in the exchange rate of currencies. While crafting FX trading strategies, CFD investors focus on inflation rates to determine the value of underlying assets. A low inflation rate in a country means decreasing prices for goods and services in a country. A high inflation rate means rising prices and, consequently, depreciating the currency value. Forex traders tend to choose those currencies that have considerable value on the Forex market.

3. Public debt

Public debt (also called government debt) means that a country can experience lesser foreign capital flow. It can be challenging for a country to arrange governmental funding, and it can start printing money for covering domestic expenses. That can cause inflation and decrease the value of a national currency. Lower prices for currencies mean they become less attractive for Forex trading.

4. Interest rates

When interest rates change, exchange rates on the Forex market change as well. High-interest rates make exchange rates rise, attracting foreign investors who want potential returns. On the other side, when interest rates in a country are low, it causes inflation, and the demand of a particular Forex asset on the market goes down. CFD traders often monitor interest rates to make a correct prediction on the direction of prices.

5. Market psychology

Some Forex price fluctuations can be caused by rumors, fear, or herd instinct. Fabricated financial news in the media may force traders to invest in CFDs on one or another currency pair. Fear makes traders buy or sell CFDs on underlying currencies because they may believe that their prices are rising or falling, and the deal can be lucrative. Other novice traders may also follow many investors that trade CFDs on assets because they believe that those are more experienced and know what they are doing. However, Forex trades should never be performed based on false news, subjectivity, and emotions.

Do I need a strategy for trading Forex?

Novice traders can delude themselves that Forex trading via CFDs is easy. In fact, CFDs are complex instruments and come with a high risk of losing money. Every Forex trader should develop a trading strategy before entering the market. Taking into account the market’s volatile nature, traders should be vigilant about buying and selling price changes on the market and balance risks with profits. A trading plan helps to work out specific actions and elaborate fundamental steps while trading Forex CFDs.

Here are some of the popular trading strategies:

1. Day trading strategy

One of the most actively used Forex trading strategies for CFDs is day trading. It implies opening and closing a position within a single day. Day trading allows taking advantage of short-term price movements. People might think that potential profit from such trade may not worth such full involvement and careful attention to the tiniest price fluctuations on the Forex market. However, day traders accumulate small profits from multiple successful trades and may receive a relatively large sum of money.

2. Swing trading strategy

Traders who want to try to take advantage of short-term price movements can also opt for a swing trading strategy. It takes days, weeks, or rarely even months to perform this approach. Since prices on the Forex market fluctuate each second, such a short-term strategy can be a practical option for CFD investors.

A swing Forex trader opens a position and waits for several trading sessions before closing it. Since investors who trade Forex CFDs with this approach need a few days to anticipate a potential profit, they are exposed to overnight and weekend fees. The prices can gap during this time, and traders will need to deal with substantially different prices during the following sessions.

3. Trend trading strategy

Unlike the two approaches mentioned above, this trading strategy focuses on long-term price fluctuations. Forex traders tend to analyze currency strength and price trends to take advantage of market momentum. Trend trading implies simply following the current trends on the Forex market since traders believe that the direction of market momentum is predictable. Many traders of all skill levels use trend trading for their forex strategies. Profits from trend trading are generated by exploiting a markets' directional momentum. In this technique, one looks for upward or downward trends in a currency price movement, then chooses an entry and exit point for his trade. The relative strength of the trend and the currency's place within the trend are used to determine the points.

4. Range Trading

In range trading, support and resistance levels are identified, and trades will be set around these key levels. Range trading is most effective in markets with little volatility and little discernible trend. A major tool used with this strategy is technical analysis.

5. Fundamental Analysis

Traders use fundamental analysis to assess a currency's undervaluation or overvaluation based on a country's economic fundamentals. The information is also used to estimate what the value is likely to do over the next few years relative to another currency.

Analyzing fundamentals of an economy can be complex, as many different elements and factors can indicate future trade and investment trends.

6. Breakout Trading

Beginners should be able to use breakout trading since it is one of the easiest forex trading strategies. Prices can break out above resistance levels, known as "bullish" breakout patterns. These patterns also occur when prices drop below support levels, known as "bearish" breakout patterns.

Breakout trades involve entering the market whenever the price makes a breakout move and continuing riding it until volatility subsides.

What can help to craft trading strategies?

Trading Forex CFDs requires an understanding of the market dynamics. Traders need to know how price trends and patterns change and what global events may affect currency prices. Technical or fundamental analysis can help with that.

Traders who prefer technical analysis collect past market performance data to develop charts, figure out entry and exit points, identify the value of underlying assets, gather historical price data, and use them for their strategies. They also study market signals and trends. Day and swing traders usually opt for technical analysis. Such tools as moving average, Bollinger bands, relative strength index, Fibonacci retracement, stochastic oscillators, and others are used for this market analysis type.

Some traders may choose to focus on fundamental analysis and study financial news. For example, they can monitor political and economic events, GDP, natural disasters, inflation and deflation rates, and other factors that affect currency prices. Fundamental analysis often helps to develop long-term strategies.

Using one type of analysis does not mean that a Forex trader should ignore another one. The combination of both types may provide even more insights for Forex trading via CFDs.

Understanding Time Zones in forex

Four major forex trading sessions can be categorized: the Sydney, Tokyo, London, and New York sessions. There are three peak sessions for forex trading. Instead of trading 24 hours a day, traders tend to focus on one of the three periods. The three sessions are Asian, European, and North American sessions, which we call Tokyo, London, and New York sessions respectively.

Be aware that there is a period between each forex trading session where there are two concurrent trading sessions. Due to the fact that two markets are open simultaneously, these are the busiest times during the trading day.

Speed up your Forex trading with PrimeFin

The Forex market is a dynamic place. PrimeFin is a Forex broker that offers CFD trading and allows to keep up with the market speed. It is a leading broker that offers transparent conditions for trading. We assure fair pricing and a wide array of tools that can help to perform quick moves to open and close a position on the Forex market at the right moment.

The following PrimeFin advantages can help you to be a step ahead of other traders:

  • Tight spreads
  • Choice of 350+ CFDs on various assets
  • Advanced Forex trading platform MetaTrader 4
  • Daily news updates from the financial sector
  • Education center with courses, tutorials, e-books, VODs about Forex trading
  • Demo account for practice
If you want to start Forex trading via CFDs with us, pass a quick registration:

1. Open a trading account by providing us with your full name, home address, and phone number.
2. Fill in a questionnaire about your previous financial experience to set up your trading account.
3. Verify your trading account by providing us with your ID and proof of residence.

Trade Forex CFDs with a popular broker and get an excellent market experience in a flash.

Summary

Entering into the world of forex trading might be scary, but knowledge of how forex trading evolved into what it is today, what the forex market really is, simple tips to help you get the hang of things and strategies you can use effectively will ease you into the journey faster.

FAQ

How difficult is Forex CFD trading?

It is a complex task to trade Forex CFDs. Many traders lose money when trading CFDs on the Forex market. It is crucial to trade currency pairs with polished financial knowledge and skills. A market is a dynamic place, where prices change very quickly. Plus, many traders are exposed to the risk of losing money rapidly due to leverage.

Can I teach myself to trade Forex?

If you are striving to learn how to trade Forex, PrimeFin offers various educational resources to boost your trading knowledge. You can find e-books, courses, tutorials, VODs, and the latest financial news about Forex trading on our website and find out about:

  • Bid price and ask price
  • Risk management strategies
  • Capital management
  • Trading orders, such as take profit or stop-loss order
  • Forex trading strategies
  • Tools available on the MT4 trading platform
You can also find other information that may help you minimize the market risk not to lose money when trading CFDs on Forex. However, you should use your knowledge to the fullest to make sure you open and close a trade at the right moment.

Why do most Forex traders fail?

The reason investors fail while engaging in Forex trading via CFDs is wrong predictions on price fluctuations. Each trade should be thought-through and executed according to a trading strategy. Traders need to follow financial news and know the latest trends on the market. They should conduct technical and fundamental analyses. However, some global events that affect exchange rates on the Forex market are out of control. So, some risks are impossible to avoid. That is why traders are recommended to invest the sum they can afford to lose.
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