What is Forex trading?
The word “Forex” is basically a conjunction of two words i.e. Foreign and Exchange. It is defined to be a process of changing one currency into another for a number of possible reasons that might include trading, tourism, commerce etc. This whole process involves buying and selling international currencies on the forex market in order to turn a profit from currency changes. In simple words, buying a currency when it is undoubtedly known that its value will be incremented or on the other side selling it when it is possible that the value may suffer a downfall. The difference between the rate the currency was purchased and sold at determines the amount of loss or profit.
ALSO READ: How to Get Started With Forex Trading in South Africa
A brief history:
Unlike stock market, forex market is a new concept which was first introduced in 1970s, allowing the currency exchange against each other. Initially it was only possible for those who could invest a handsome amount such as banks, multinational corporations or some individuals who had enough earning to meet the investment standards. However, later on it became possible for a normal individual as well, by simply doing it through a dealer or broker. Online forex market made it even more feasible. An insight of how this market works is given in the next section.
How does Forex market work?
Forex market is one of the most liquid financial markets in the world with an average trading amount of “Six Trillion US Dollars”. The term “liquid market” refers to the one where a whole lot of buying and selling takes place with a low barrier of entry i.e. low transaction fee. It works on the principle of profit/loss. If the currency is purchased/exchanged at a lower price and sold at the target price (definitely higher than the purchase cost), then it is profitable for the buyer and vice versa. Furthermore, to gain maximum amount of profit, one must keep in mind the time zone of different currencies to determine at what time most of the forex dealers are active. More the number of forex traders, more will it be beneficial.
Working of Forex market in South Africa:
South Africa’s forex market is supported by Financial Sector Conduct Authority (FSCA) regarding the security against financial fraud and providing a strong and active marketplace. Any company or organization that provide financial facilities including banks, forex traders etc. are regulated by FSCA. It becomes necessary for such traders to keep customer funds separate from firm operational funds, and they should be examined on a regular intervals to maintain that customer resources are not misused.
The most advantageous thing for South African Forex brokers is ZAR (South African Rand) trading accounts. Since, any other account i.e. US Dollars account or Euros account asks for conversion fee at the time of exchange, it creates a worthy opportunity for South African forex traders to avoid such fee by utilizing their ZAR trading account, making the transaction and deposit a much faster process.
Three distinct categories of forex market in South Africa exist which are as follows:
- Spot: The physical trade of a currency pair that occurs at the precise moment when the deal is fixed and hence the name spot (i.e. on the spot).
- Forward: An agreement is signed to buy or sell a specified amount of a currency at a stated price, to be established either at a given date in the future or within a range of dates.
- Future: An agreement to acquire or sell a specified quantity of currency at a specified price and on a set date. Unlike forwards, this agreement is legally enforceable.
Perfect trading hours and popular forex pairs in South Africa:
In forex trading, the thing that matters the most is how you tackle it by keeping in view the trading hours and the currency pairs. This is the only market that is operating 24 hours a day and five and a half days a week. The best trading hours for South Africa fall where most of the possible traders from all over the world are active. Therefore, it starts from 10:00 SAST and ends at 16:00 SAST where London, UK stays active the whole time, Tokyo, Japan for two hours and New York City, USA for an hour only. This is the only time range where three countries are active according to SA’s time zone, the rest of times either two or only one country is available or trading.
Before moving towards popular forex pairs, let’s just focus on what forex pairs actually are. In the foreign exchange market, a forex pair defines the relational estimate of the relative worth of one currency unit against another. In South Africa three categories are defined accordingly i.e.
- Major pairs including one the top seven international currencies against USD, and hence forming the standard for the rest.
- Minor pairs are the ones not including US currency against the top seven currencies, making the market less volatile. These are more volatile than major pairs.
- Exotic pairs involve unstable currencies emerged from a recently developed market. Risk factor is increased in this case.
Advantages of Forex in South Africa:
- Low initial cost:
This is a plus for forex trading that it asks for a very less initial budget to initiate the trade. Some traders have set it as low as 70 Rand i.e. 5 US Dollars only whereas the recommended amount to invest initially is 15000 Rand i.e. 1000 US Dollars.
- Leverage:
Forex market is also referred as leveraged market. A very small amount may result in an elevated profit.
- 24 hours market:
Unlike many other trading markets, Forex stands the one that is active 24 hours a day from Monday to Friday. Choosing the beneficial time zone matters the most. Traders in the South African time zone can trade during the two busiest trading sessions, namely the London and New York sessions.
- Buy and sell orders:
Both buying and selling orders can be profitable. If the currency is predicted to suffer a downfall, it is recommended to pass selling orders against the currency which will be of higher value in future.
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