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How to trade forex; a brief guide for beginners

How to trade Forex in South Africe
Forex is a short form of writing and pronouncing ‘foreign exchange’. It is the process of converting one currency into another. There are various reasons for doing this; such as tourism, international business, e-commerce, etc. Forex trading is the business of changing one currency into another usually from the forex market. Over the years, it has become a big business for individual and corporate institutions. Forex traders are individuals or institutions who buy and sell currencies with the purpose of profiting from the exchange rates.

Content:
  1. What is Forex?
  2. Forex Currency Pairs
  3. Important Forex market terms
  4. Steps on how to trade forex in South Africa
  5. Forex trading with InvestBy
  6. Forex trading strategies
  7. Summary
  8. FAQ: Learn how to trade Forex in South Africa

What is Forex?

The foreign exchange market is a virtual marketplace where huge volumes of forex transactions take place every week day; 24/5. It is currently the largest market in the world with a daily turnover of about $6 trillion in forex trading volume. The major market participants of the global forex market are the large international banks, huge investment firms, hedge funds, etc. Access to the forex market is tiered and at the lowest level are the individual forex traders who only gain access through online forex brokers.

There is no central control of the global forex market but the major trading centres are in London, Tokyo, New York and Sydney. The time zones of these trading centres overlap thereby making the forex market available round the clock. So, forex trades continue every week day; that is, 24/5.

Forex Currency Pairs

In the forex market, the traded currencies are grouped in currency pairs. This is because every foreign exchange transaction comprise of a purchase and sale transaction. For example, if you have South African Rand (ZAR) and wishes to change it to United States dollar (USD), you will sell your ZAR and buy USD. The forex market groups the currencies into pairs and assigns exchange rates to them depending on the market forces. Some currency pairs are:

• USD ZAR representing the dollar-rand pair
• EUR USD representing the Euro-Dollar pair
• USD JPY representing the dollar and the Japanese Yen pair.

The first currency in every forex pair is known as the ‘base currency’ while the second one is known as the ‘quote currency’. The exchange rate is always expressed in terms of the quote currency. For example; if the exchange rate is given as:

EUR USD = 1.15942

It means that 1 EUR will exchange for 1.15942 USD in the foreign exchange markets. Currency pairs make it easy to write the exchange rate of any two currencies as a single quote. In the forex markets, the exchange rate is always fluctuating.

Major currency pairs

The major currency pairs are the pairs that are mostly traded in the forex market. The currency belongs to countries owned by developed economies. In the forex market, they are characterized by high liquidity and tight spreads. In fact, they account for up to 80% of all forex trades. They are as follows:

• EUR USD
• GBP USD
• USD JPY
• USD CHF
• AUD USD
• USD CAD
• NZDUSD

The last three currency pairs are also called commodity pairs. This is because the countries that issues the currencies; that is Australia, Canada and New Zealand, produce and export huge volumes of commodities. So, their economies are partially reliant on the price of commodities. Note that all major currency pairs has the USD.

Minor or cross currency pairs

Often referred to as crosses, these pairs are less traded than the major currency pairs. USD is usually not part a minor forex pair. Examples are EUR CHF, EUR GBP, EUR AUD, CHF JPY, etc.

Exotic currency pairs

These are the least traded forex pairs and they have the highest pairs. The pair is normally made up of a currency from an advanced economy and another from a developing economy. An example is the USD ZAR pair which is made up of USD which is from a highly developed economy and Rand (ZAR) from South Africa; a developing economy. Other examples are EUR TRY, GBP NOK, USD MXN, etc.

Important Forex market terms

In order to understand the forex market and forex trading, there are some terminologies which you must learn what they mean. Below are some of them: 

Spread

In the forex markets, two prices are quoted for each currency pair; the ask and bid price. Forex traders buy at the ask price and sell at the bid price. The difference between the ask and bid price is known as the spread.

Most forex brokers mark up the spread in order to incorporate their trading fees, so retail forex traders always love to trade with brokers that offer low spreads.

Pip

Percentage in point or pip is the standard unit that is used to measure the price movements of currency pairs. In the forex market, the exchange rate of most currency pairs is written in 3 or 5 decimal places. A pip is the fourth decimal place while a pipette is the fifth decimal place. For example, if the price of the EUR USD moves from 1.15942 to 1.15632, then:

Loss = 1.15942 – 1.15632 = 0.00311 = 31 pips or 310 pipettes.

Forex traders will say that the EUR USD lost 31 pips.

For trades involving the Japanese Yen as the quote currency, it is expressed in 3 decimal places. In this case, the pip is the second decimal place. So, if the USD JPY moves from 111.204 to 111.132.

Gain = 111.204 – 111.132 = 0.072 = 7.2 pips or 72 pipettes. In this case, a forex trader will say that the currency pair gained 7.2 pips. 

Contract size

In the forex market, there are standardized quantities of currencies that can be bought or sold in a transaction. You just cannot decide to 525 units of EUR USD or any other currency pair. The standards are:

• 1 standard lot = 100,000 units of currency
• 1 mini lot = 10,000 units
• 1 micro lot = 1,000 units

For most forex brokers, one micro lot is the least volume that you can trade.  

Leverage and Margin

Leverage is a tool that is used to multiply the trader’s market exposure and his trading power. It enables a forex trader to open large positions worth multiple of his account balance. For example; with a leverage of 1:500, a trader can open multiple positions totalling 100,000 ZAR while his account balance is 200 ZAR. This gives him opportunities to make more potential profits but it also equally multiplies his losses if he is on a losing trade.

Margin is related to Leverage. It is expressed as a percentage while leverage is given as a ratio. Margin is the deposit required to open a position higher than the trader’s account balance. For example, a leverage of 1:100 represents a margin of 1%. If a trader is on a losing trade and his margin drops to a certain percentage, the broker initiates a margin call; which is a call or notification to the trader to deposit more funds or close the losing positions.

Long and short position

When a forex trader opens a long position, it means that expects the exchange rate to go higher and so, buys the currency pair. This is done by clicking ‘buy’ on the broker’s trading platform. A short position is the opposite; that is, the trader predicts a price decline and so, he sells the currency pair on the platform.

Orders

In the financial markets, orders are instructions to buy or sell a given security at the best price available. In the forex market, orders are instructions given by forex traders to forex brokers to buy or sell a specific currency pair. Though orders can be placed over the phone, they are generally placed on the trading platforms provided by forex brokers. Here are some common types of orders:

• Market order: This is an order to buy or sell a currency pair at the prevailing market prices.

• Pending order: instructs the broker to buy or sell in future when predefined conditions are met.

• Stop order: This is an order to buy or sell a security when the market price has reached a specific price known as the stop price.

• Limit order: This is an order issued to a broker to buy or sell a security at a given price or even a better price. The trader sets this limit price.

Steps on how to trade forex in South Africa

In order to start trading forex, follow the outline below:

1. Get an access device

The forex market is a virtual marketplace, so, in order to gain access to trade forex, you need an internet-enabled device such as a computer, tablet, phablet or smartphone. Unlike the stock market and other financial markets traded on exchanges, forex trading is done over the internet and the internet must be accessed via an electronic device. 

2. Find an online forex broker

Online forex trading is done via online forex brokers, so, a retail forex trader must choose a broker from the myriads of forex brokers that operate over the internet. Most times, this is a challenge because of the disparities in the services offered by the brokers. Some are unregulated while others are regulated forex brokers.

A regulated forex broker is a broker whose services are licensed and authorized by an established financial services regulator. These brokers operate under strict guidelines stipulated by their regulators. They are generally safer, financially stable and more professional in their services.

Generally, you should consider the following factors before choosing a forex broker:

• Cost: Checkout its trading fees: spreads, commissions, swap fees, withdrawal fees and general trading conditions.

• Forex trading platform: Check if their trading platform is suitable for you. For example; if you have a Mac computer, do they have a platform that supports your device? Does the platform features support your trading style? This is why many forex traders opt for third-party platforms such as the MT4; which is reliable and already have an established community of users.

• Leverage and margin requirements: Some brokers allow maximum leverage of 1: 20 while others allow up to 1:3000. Be sure to understand your leverage requirements, the risk involved and the leverage options available with the broker.

• Minimum deposit and deposit options: This is important because some brokers require only a paltry sum like $5 to start trading forex while others require a minimum deposit of $1,000 or more. Find out how much money is needed and crosscheck with your risk appetite. Also, be sure to check if the deposit method is suitable for you; for example, if you have $500 in Skrill, be sure that your broker accepts Skrill payments.

• Trading tools: beginner traders often rely on the trading tools and services provided by the forex broker. They may start practicing with a demo account while learning from the training articles or trading education provided. Other tools like market news, technical analysis insights are also beneficial to forex traders.

• Customer support: The best forex brokers are always ready to assist its clients with any questions, technical problems or any difficulties that they encounter while trading. Sometimes it is better to use a broker that is easy and fast to reach in a language you can speak well.

3. Open and fund a trading account

After settling for a forex broker, the next step is to create an account with the broker and fund it with your trading capital. Most times, it involves filling an online form and answering a few questions about yourself, occupation, net worth, source of funds, trading knowledge and experience, etc. If you are dealing with any of the regulated forex brokers, you will be required to undergo the compulsory ‘Know your customer’ (KYC) procedure. It only involves uploading a copy of your ID card and a utility bill to prove your identity and address.

Most brokers have several deposit options with various processing times. Generally, bank wire transfers have the slowest processing times. It takes 2-7 days while credit or debit cards are instantly processed. Choose the most convenient option to you. There may be several account types requiring different minimum deposits. Choose the best account type according to your capital and trading experience.

4. Access a trading platform and start trading forex

A forex trading platform is a computer software that interfaces forex brokers to traders thereby enabling forex traders to place their orders and monitor their trading accounts. Every forex broker gives its clients access to at least one trading platform. On the platforms, forex brokers stream the exchange rates of the currency pairs in real time. For each pair, ask and bid price are quoted. Most trading platforms come with a charting package which includes tools for technical analysis and also tools for placing and managing orders. Some trading platforms run on browsers while others run on specific operating systems like windows, android, iOS, etc. 

Forex trading with InvestBy

InvestBy is a CFD and forex broker that is established in Belarus but offers its services to clients from different countries. On its platforms, institutional and retail forex traders can trade more than 45 currency pairs and over 300 CFDs in stocks, indices, commodities, and cryptocurrencies. Traders are offered the following trading platforms:

    • WebTrader: This is a proprietary platform that runs on any web browser. No downloads or installations are required because it runs across all operating systems.

    • InvestBy mobile app: This is a mobile app that is downloadable on Android and iOS devices. With the app, you can monitor the markets, carry out analysis, trade forex, and other CFDs while on the go.

    • MT4: This is the most widely used trading platform among forex traders. It is available as WebTrader, downloadable windows application as well as android and iOS apps.

    Follow the outline below to start trading forex with InvestBy:

    • Click on the ‘open account’ button found at the top of the page.

    • A 5-part form is displayed.

    • Enter your personal detail, fill the questionnaire, upload KYC documents and make a deposit.

    • When your trading account is approved, choose a platform, log in and start trading. Open a forex trade by going long or short on any currency pair of your choice.

    • When you are satisfied with the trade result, close your position. When this is done, the system automatically calculates your profits or losses and updates your trading account balance.

    Foreign exchange trading comes with the high risk of losing money rapidly due to leveraged positions. It is important to understand that your trading capital is at risk and previous success is no indication of future success. 

    Forex trading strategies

    A trading strategy is a plan or technique designed by traders to buy or sell a currency pair at any given time with the aim of making profits. Generally, the forex markets are volatile; currency prices fluctuate a lot. The major currency pairs are usually more liquid and less volatile when compared to the exotics.

    Most brokers state that it only takes a few minutes to create a new trading account, make a deposit and start trading forex on their trading platforms. But, the major problem confronting a forex trader is ‘how to trade forex at any instant’. Should he buy or sell? For this reason, a forex trader will deploy a trading strategy and carry out rigorous analyses in order to know exactly when and how to approach the forex market. Sometimes you may predict a surge in the exchange rate of a currency pair but after some time, the price reverses and the exchange rate begins to decline. There are two basic types of analysis:

    • Fundamental analysis: This approach focuses on the study of the economic, social, political, and other forces that affect the currencies that make up a currency pair.

    • Technical analysis: This analytical method focuses on studying historical price movements and charts with the aim of identifying patterns and trends hoping that they will repeat in the near future.

    Virtually all trading strategies depend on one or both of the analytical methods above. Below are some of the popular forex trading strategies:

    Scalping

    This forex trading strategy aims to capture the small price movements within a small time frame. Normally, scalpers open and close forex trades within a few minutes. So, they end up opening and closing several trades within a trading session which results into multiple trading fees. Most scalpers derive their trading strategy from technical analysis.

    Some scalping strategies can be automated and deployed using forex trading robots. These software algorithms can access the foreign exchange market via broker platforms, scan the markets to identify trading opportunities, then, open and close forex trade positions automatically without trader intervention.

    Day trading

    This currency trading strategy is deployed by opening and closing trade positions within a day. Day traders do not incur swap fees normally paid when you maintain open positions overnight. The trader’s aim is to capitalize on the intraday currency price movement of the forex pairs.

    Swing trading

    Swing traders aim to capture the market swings that happen within a few days. So, they normally open and maintain trade positions for few days.  This currency trading strategy demands sound knowledge of technical analysis as well as trading experience. 

    Summary

    The forex market is a global marketplace where forex traders buy and sell currency pairs among themselves. It is currently the largest financial market in the world; even bigger than the stock markets. Forex trading is a serious business and profession; it involves trading currency pairs for profit purposes. To start trading forex, you need to find an online broker and create a live trading account with the brokerage. To become a successful forex trader, you must have at least one forex trading strategy, else you will just be guessing or gambling.

    InvestBy is a regulated forex broker that provides trading platforms for online CFD trading. The broker boasts of sophisticated technology which has resulted into low spreads, lightning speed executions, high leverage, and forex trading in a digitally secured trading environment. Beginner traders are provided with demo accounts and an education center. Pro traders are supported with modern platforms and trading tools.

    InvestBy’s overall daily trading volume is growing owing to increased patronage. Why not come with your trading style and forex trading strategy to enjoy excellent services from a reliable broker?

    Trading currencies come with the high risk of losing your invested capital. Be sure to understand the risks before trading CFDs and forex with Investby or any broker. 

    FAQ: Learn how to trade Forex in South Africa

    Is forex trading profitable?

    Of course! If it is not profitable, there won’t be millions of forex traders in our world today. The major problem is that it is very difficult to make profits from the forex markets because of the high volatility and market reversals. However, if a trader has excellent knowledge of forex trading and forex market, huge trading capital, a proven trading strategy and plan as well as a good risk management strategy, he stands a better chance of succeeding and making profits. 

    Can I teach myself to trade forex?

    Yes, you can. There are lots of forex articles, training materials, video tutorials and online trading academies that teach forex trading from beginner to professional levels. Some are free but the quality ones come at a cost.

    Can I trade forex with $100?

    Yes, it depends on the forex broker involved. Some brokers offer low deposits and high leverage enabling traders to open large volumes of trades with a paltry sum. Here are some forex trading examples with small trading capital:

    • On a leverage of 1: 100, you can open a trade for 1 micro lot of EUR USD at 1.15902. The total amount needed to open the position is $1,159.02 but the required margin is $11.59

    • On a leverage of 1:500, you can trade 1 mini lot the same EUR USD at 1.15902. Here, the nominal amount is $11,590.20 but the required margin is $23.18.

    Can you get rich by trading forex?

    We cannot rule out the possibility of getting rich through forex trading, but it is extremely difficult. This is because you must have excellent knowledge of the markets, robust trading plans, proven forex trading strategies, risk management strategies and other trading tools. You must also be a disciplined trader and must have a huge trading capital.
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