KAROO BUSINESS NEWS - In the last 10 years, currency or forex trading has become popular among retail investors in South Africa. Increasing use of smartphones & availability of low-cost internet data, has made online trading more accessible.
Forex market is the world’s largest financial market with daily transactions of over $6.6 trillion as per BIS data from 2019.
Unlike other capital markets such as stock-exchange, forex is a completely over-the-counter decentralized marketplace, which means there are no central exchanges.
The majority of the forex trade takes place between institutions, companies, banks, and governments. The volatility in the forex market creates an opportunity for retail forex traders.
Traders make money by speculating on the fluctuations of currencies, while brokers make money by charging fees to traders for facilitating their order flow.
Although forex trading provides an opportunity to retail investors to make money from the FX market fluctuations, but the retail trading in Forex and CFD instruments is inherently very risky. There are multiple risks associated with the FX market from geo-political & country related risks, to leverage and interest rate risks.
Only experienced traders must trade in the forex market. If you are considering to trade forex or CFDs, here are essential facts that you must know.
Forex Trading market in South Africa is largest in Africa
The demand for retail forex trading in South Africa has been steadily increasing, the daily volume crossing well over $20 billion USD in 2019. Out of the total $20 billion forex volume, about $2.21 billion per day consists of spot and derivatives instruments. While forex volume for ZAR, globally is over $70 billion daily of which almost 13% was retail & speculative.
South African traders invest in a variety of currency instruments such as exchange-traded funds, forward, future, option, and others. However, Derivatives and CFD trading remains more popular with retail investors.
The South African retail Forex & derivatives trading market is regulated by Financial Sector Conduct Authority (FSCA). FSCA is responsible for issuing (Over the Counter Derivative Provider) ODP licenses to brokers and works as an investor guardian. The brokers need to adhere to regulatory compliances, otherwise, their licenses can be revoked, and penalties could be imposed.
Currently, the country has over 1000 financial entities registered with FSCA of which 60+ entities having ODP licenses. The average trading figure of SA forex traders is $742 per quarter with around 1,90,000+ active South African traders.
The daily retail trading volume is by far the largest in Africa, compared to other major markets Nigeria, & Kenya.
FSCA Regulated Brokers
When it comes to investor safety & financial market regulations, South Africa is a much mature market that other countries in Africa.
FSCA’s strong compliance requirements put brokers into necessary checks. A broker has to meet all the reporting and compliance requirements before it becomes eligible for an ODP license. FSCA regulated brokers are preferred by traders not only in South Africa but across the African countries including Kenya, Nigeria, and Tanzania.
The ODP regulatory regime provides a safety net to investors.
First, brokers need to conduct due diligence (KYC) on their clients. Only then clients can trade in high-risk instruments.
Second, strict capital-adequacy requirements ensure that a broker always maintains a minimum operating capital as mentioned in ODP guidelines.
Lastly, a broker also needs to provide continuous access to all forex transactions data to the FSCA. The last criteria are applicable only for brokers having a physical office in the country. The ODP regime has been designed to protect investors from unscrupulous brokers.
That’s why it is very important to trade with only FSCA regulated forex brokers. Quite evidently, trading with unregulated brokers can be risky as they don’t come under the FSCA regulation. As a rule of thumb, always choose a Tier-I licensed broker for forex trading.
Fees and Spread charged by brokers
Choose a broker that is transparent in its offerings and offers the lowest spread. While commissions and forex spread vary, they are the most important factors which you must understand before trading.
In simple terms, a spread is a difference between the maximum buying price and the lowest selling price of a currency pair.
The broker quotes the prices of a currency pair in the bid-ask spread. For instance, suppose EUR/USD currency pair is currently trading as 1.2000. And your broker has quoted a bid-ask price of 1.2002/1.2000.
If you want to purchase this currency pair, you have to pay 1.2002 USD, while the selling price is 1.2000 USD. Here, the bid-ask spread is 2 pips (0.0002). If you sell it immediately, your broker will charge the difference to close the order.
As a rule of thumb, choose a broker that offers the lowest possible spread on many currency pairs.
Brokers also charge a commission on executed trades.
It can be of two types: fixed fees and relative fees. While the former fees model is a flat charge on each trade (e.g., $1 per trade), the latter commission model is based on the size and volume of the trade (higher the trade-volume, higher the charges).
Apart from these charges, there are also other hidden fees in the form of inactivity fees and overnight charges on unclosed trade orders. While selecting your broker keep these important overall trading costs in mind.
Demo Account
Online traders should always start with demo trading. You will need to practice, learn risk management, and get familiarized with numerous tools offered by the broker.
Most FSCA regulated brokers offer demo account, like Exness in South Africa has a free demo account which is available for unlimited period.
You can trade on demo account to build your strategy, practice safe use of leverage, learn risk management, and place virtual orders in the market without risking any real money.
What are the risks of Online Forex Trading?
Forex trading is certainly not for inexperienced investors, only experienced investors should consider this instrument.
If you are looking for safe investments, stock-trading or mutual funds are comparatively much better options.
As, Forex & CFD trading is inherently risky. It comes with certain risks that you must know before risking your capital.
Leverage Risk: Similar to stock trading, leverage or trade on margin allows you to trade in volumes by depositing margin money with a broker.
Let’s take an example to understand leverage. Suppose EUR/USD is currently trading at USD 1.1305. You place a trading order using USD 1000 as capital. If the currency price moves to US1.1405, you would have made USD 10 from this trade.
However, by using leverage you can increase your order volume without putting in any new capital in your trading account.
Now suppose you place a 1 lot buying order using 1:100 leverage. But instead of prices getting up, the dollar value fell to 1.1205. Your trade loss would be USD 1000. This is how leverage works. While it can increase your profits, it can also magnify your losses. So you must use leverage wisely or not use it at all, and never use more than a 1:5 leverage ratio.
Unregulated brokers: Many unregulated brokers offer lucrative promotions that can be certainly tempting. They can disguise as brokers but in reality, they may be running pyramid Ponzi schemes or betting against you.
There are numerous instances when retail investors fell prey to these unscrupulous brokers. Before choosing your broker, check their regulatory status. Always choose well-regulated brokers having Tier-1 and Tier-2 licenses from top tier regulators such as FSCA, FCA, ASIC, and CYSEC.
Volatile Market: A political change or a natural catastrophe can impact the prices of currency pairs. Many factors influence the forex market.
An increase in the US interest rate can cause the strengthening of the dollars against most of the currencies. Keep an eye on the news especially related to the financial market, the forex market responds to major world events.
Although traders can’t do much about these events, being aware of the market conditions will certainly help in making better trading decisions. A word of advice, don’t leave a trading position unclosed at the end of the session.
Risk of Ruin: According to some reports, around 70-80% of traders lose their money in forex trading. CFDs are not for inexperienced traders without any knowledge.
Trading is be profitable, but profits are not guaranteed. Always risk what you can afford, and calculate the risk to reward before entering into any trade.
Article supplied by Forex Brokers SA.
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