In South Africa, many people choose to invest in the foreign exchange market. South African Forex traders enjoy the protection of the Financial Sector Conduct Authority (FSCA), therefore trading in this market is entirely lawful.
This primer will teach South Africans the fundamentals of the Foreign Exchange market and how to make their first trades.
How to trade the Forex market in South Africa
The four basic elements of a foreign exchange trading are the underlying asset, the size of the trade, the price, and the trade direction (buy or sell). Each of these has its own distinct impact on the trade’s potential for profit.
Currency pairs as the asset
In forex trading in South Africa for beginners, the asset is always a pair of two currencies. Because of the simultaneous purchase and sale of both currencies in a quoted pair, currency quotes are always presented in pairs.
In any currency pair, the first currency is known as the base currency, while the second is known as the quote currency. The Rand is the base currency and the US Dollar is the quoted currency in the ZAR/USD exchange rate.
Forex quotes
A quote or price is the value of a currency. The quote currency’s value is established in respect to the base currency because currencies are quoted in pairs.
The value of a currency pair is quoted as the difference between two prices: Those looking to buy (or “go long”) pay a “ask price” that is somewhat higher than the current market price.
The other price is the bid price, and it’s what you’d pay if you were selling (or shorting) at a discount from the current market price. The spread is the difference between the two prices that your broker determines.
Using leverage
Leverage trading is a method of increasing the amount of a deal by borrowing funds from a liquidity provider.
Margin is the initial deposit made by a trader, and leverage is the additional value added to a trade. The total value of the trade, not simply your margin, will determine your gain or loss.
Leverage is widely used while trading CFDs since it enables investors to take on larger positions than their initial capital would otherwise permit.
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Trading either long or short
The term “long” refers to the action of purchasing with the expectation that the value of the “base” currency will increase in relation to the “quote” currency. A long (purchase) position is profitable if and only if the price of the currency pair rises.
When selling, one is said to be “short” the base currency since the seller anticipates that this currency’s value will decline in relation to the quoted currency. A short (sell) position is profitable if and only if the price of the underlying currency pair falls.
Final Thoughts
Some of these phrases and concepts may be unfamiliar at first, but you’ll quickly grasp the gist of them once you see them in practice. Demo trading accounts are a great way to get a feel for the Forex market without risking any of your own money.
Some brokers offer South African-based support and demo accounts, maintain relationships with South African banks, and operate out of physical locations throughout the country.
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