What is Forex Trading – Overview:
Forex trading is a network of buyers and sellers, who transfer currencies between each other at agreed prices.
Forex trading is the process of speculating on currency and commodity prices in order to potentially make a profit.
Forex, which is also commonly referred to as FX, is a decentralized global market where all the world's currencies are traded with each other. What makes Forex so attractive is that it is one of the most liquid markets in the world with an average daily trading amount exceeding $5 trillion.
South Africans can legally trade in the foreign exchange market through an FSCA regulated forex broker authorized to offer Derivative instruments to traders in South Africa
In South Africa, more than 25 Billion US Dollars (about R400 Billion Rand) are traded daily.
A simple analogy to help aspiring traders understand Forex trading is to look at a retail store that sells its products cheaply because they buy in bulk. The process of stores shipping large quantities of goods to their customers is basically seen as "liquidity" in the "liquid market". Stores profit from low prices and low prices ensure that their clients come back shopping for more.
In previous years, Forex was a rich man's game played only by rich investors and big corporations. However, once online trading platforms took over the market, Forex trading became valuable by any retail investor or individual.
Currency Trading – How It Works:
Currencies are traded with each other as forex pairs, for example USD/ZAR. Currency trading is generally facilitated by global banks and central banks, with the central bank being a core element of the Forex Market. A Forex trader will buy and sell currencies with the primary goal of making a profit. Profit or loss is the difference between the buying and selling rates of the currency pair being traded.
Basically Forex is about trying to speculate on currency fluctuations between two different countries, as mentioned in the examples above – USD: United States Dollar$ and ZAR: South African Rand R. These two currencies are usually referred to as 'currency pairs'. '. ' and this pair consists of a base currency and a quote currency.
The first currency (USD in this case) to appear in a Forex pair is referred to as the base currency and is the currency that is bought or sold for the quote currency.
Some of the most popular major currency pairs include EUR/USD, USD/JPY, GBP/USD, and USD/CHF.
Forex Trading Risks – Revealed:
Each type of trade has its own risks and Forex Trading should not be taken lightly. Potential traders should arm themselves with all the knowledge, tips and expert advice available. The main risks include:
The interbank market is highly regulated, but Forex instruments are not standardized, and in some places around the world, Forex trading is not subject to any form of regulation. Forex brokers are set to undergo regular audits, to communicate certain service changes to their clients, and more. This ensures that currency trading is ethical and fair for all involved.
This is 100% the responsibility of the trader and self education can be the difference between profit and loss. Traders must fully understand what drives currency movements, the economic and political landscape in those economies as well as global events, to name a few.
Most of the leading Forex Brokers will provide educational materials and tutorials.
Forex Market – Overview:
One of the most unique and interesting aspects of this international market is that there is no official central market for foreign exchange such as the Stock Exchange. In contrast, currency exchange is done electronically, which means that all transactions occur through a global computer network between various merchants in different locations around the world, rather than one centralized exchange.
The Forex market is open 24/7, (5) five and a half days a week, with hubs in several major financial centers at:
- London
- New York
- Tokyo
- Zurich
- Frankfurt
- Hong Kong
- Singapore
- Paris
- Sydney
In almost every time zone in this location, trading takes place. This means that when the trading day in the US for example ends, the Forex market starts again in Tokyo and Hong Kong.
The following is a brief overview of the terminology that Forex traders will encounter in their trading journey. It is very important to understand the language used in the Market because it is faithful.
Forex Quotes:
In Forex trading, investors will come across terms – 'bid' and 'ask' prices. The bid is the price at which a trader can buy the currency, while the ask price is the price at which you can sell it.
Spread refers to the difference between the bid and ask prices of a currency pair. For example – If the bid price is 101.15 and the ask price is 101.20, the spread is 5. The spread is measured in pips, so it is called a 5 pip spread.
Forex Instruments:
Financial instruments are financial media used in financial markets. One of these instruments is called Swap. Currency exchange is the most common type of forward transaction agreement. A swap is a trade between two parties in which they exchange the principal amount and interest in one currency, for the same amount in another currency.
Leverage:
Leverage, also known as margin, is the percentage or fractional increase that investors can get from the amount of capital they hold. Leverage will allow investors to trade speculative values much higher than the capital they hold. Simply put – Leverage is borrowed capital on a live trading account.
Long/Short Position:
A Long (buy) position refers to the purchase of an asset, with the anticipation that its market value will increase, while a Short (sell) position refers to a sale of the asset, with the expectation that its market value will decrease
pip:
Percentage in points or Pips refers to the smallest price movement any exchange rate can make. A pip measures the amount of change in the exchange rate for a currency pair in the forex market and is the fourth and final number after the decimal point. Market gains and losses are measured using Pips.
Lots:
Forex is traded in lots and lots measure the number of transactions. A standard lot is equal to 100,000 units of the base currency, a mini lot has 10,000 units and a micro lot – has 1,000 units.
Limit:
Margin refers to the initial capital a trader needs to invest in order to open a position. Margin will also offer traders the opportunity to open a larger position size. When an investor trades on margin, they only need to give up a percentage of the full value of the position for the trade to be opened.
Profit/loss:
Profits or losses on Forex are realized when an investor closes a trading position. With Profit, the margin balance increases, with losses, it decreases.
How to Choose a Forex Broker – Must Read.
Finding the right Forex broker can be a tricky task. While most brokers may offer the same level of access and quality in the foreign exchange market, their procedures and policies may differ dramatically.
Each Forex broker will represent a different level in the industry. Some will represent a high level of expertise with direct access to the market while other brokers look distant with very few connections to offer. The types of forex are very important to understand before trading.
Dealing Desk (DD):
Dealing Desk or DD brokers refer to market makers. Dealing desk brokers or market makers will usually give investors a fixed spread and choose to quote above or below the real time market price at any given time. Choosing to trade with a trading desk is a wise choice for both novice and expert traders who wish to avoid trading directly with liquidity providers. Dealing desk brokers usually accept payments via spreads.
No Dealing Desk (NDD):
No Dealing Desk forex brokers are companies that allow forex traders to have direct access to the interbank market. A reputable NDD broker will not ask for price re-quoting and traders will have the opportunity to trade after any economic announcements without facing any restrictions.
Electrical Communication Network (ECN):
An ECN broker is a company that offers and displays details of the actual order book which usually shows the orders processed plus the prices offered by different banks in the interbank market. Most ECN brokers will offer important information to all Forex Market participants to increase market transparency. ECN brokers will allow investors to process all their transactions on the interbank market and charge a commission on each volume traded for income.
Direct Processing (STP):
STP or Straight Through Processing brokers directly send trading orders to their liquidity providers and do not interfere with order execution transactions. Most STP forex brokers will work with a choice of liquidity providers, giving their clients a better chance of success in the forex market.
MTF (Multilateral Trading Facility):
MTF exchanges guarantee that buyers and sellers of financial instruments can collaborate according to non-discretionary rules. Although MTF is not a regulated exchange, it operates under the same rules to ensure a fair trading system. MTF exchange ensures price efficiency and efficient clearing of transactions. Compared to traditional exchanges, multilateral trading facilities provide traders with greater flexibility, faster order execution speeds and lower brokerage fees.
Forex Trading Account Types:
The most common live trading account types will be based on the lot size the investor wants to trade. Taking this into account, each different Live trading account will have a different associated minimum deposit rate.
Here is an overview of the Most Common Forex Trading Account Types:
a. Mini/Micro Account
Micro Account is the most suitable account for traders with small capital. The Micro Account will allow investors to enter the financial market with a small minimum deposit limit. However, since Micro Accounts have a low entry barrier, there will be restrictions on investors' trading activities.
On the plus side, Micro Accounts will help traders to control their level of risk, making this account type the perfect choice for novice traders.
When it comes to Mini Accounts, investors will be allowed to enter into a contract size of 10,000 units of the base currency. Similar to Micro accounts, Mini Accounts require relatively small capital to get started.
b.Standard Account
Different brokers will use different names to refer to their standard accounts. Popular terms include Classic, Silver, or Intermediate.
Standard accounts generally have a minimum deposit limit of between $100 – $500 and will give users access to standard lots of currency. Since standard accounts will require a larger minimum deposit to trade full lots, most brokers will provide investors with more services and better offers than those associated with smaller account types.
c.VIP/Professional Account
VIP or Pro accounts are generally reserved for investors who have large capital. VIP or Pro accounts usually have a high minimum deposit limit of around $10,000 and will allow investors to trade standard lots.
A VIP or Pro account is generally also an ECN account, which means it will allow investors to trade on the market directly. Investors should note that professional accounts for EU clients are slightly different.
d.Islamic Account, Free Exchange
Swap-free or Islamic accounts refer to the account options available to clients who are unable to earn or pay interest due to their religious beliefs.
Under Sharia law, Muslim investors are prohibited from taking or giving interest in any type of activity. Islamic investors should be aware that Swap-free accounts may come with higher trading fees and various restrictions. No fees in the form of interest will apply to Islamic accounts.
Apart from Live Trading accounts, most reputable regulated Forex Brokers will offer Demo accounts.
e.Demo Account
The demo account will allow investors to practice their trading without risking real capital. A Demo Account is a virtual account filled with virtual currency, most of which are free to use, but may have a limited period of use.
f.Forex Account Overview
How to Open a Live Trading Account – Step by Step Example
Opening a live trading account is generally an easy process and most Forex Brokers will follow a basic registration structure. Applicants must complete registration which may include completing personal information and financial details.
The following is a display of the IG Group Registration Process as an example:
1. Step 1: Create a Live Account
Start the app by clicking on the green "Create Live Account" button located on the landing page or throughout the website in the page header.
2. Step 2: Registration Form
The applicant must start the setup by providing general information including a valid email address and country of residence.
3. Step 3: Complete Personal Information
The next step will require more personal information to be added, including the applicant's direct contact details and identification number.
4. Step 4: Address Details
Applicants must complete their address details to proceed to the final step of the application process.
5. Step 5: Financial Information
The second final step is to complete financial details, including the applicant's annual income and employment history.
6.Step 6: Confirm Order.
The next step is to submit the order and wait for the confirmation screen. The order confirmation screen is very important because it functions as a ticket number – which can be used as a reference.
7.Step 7: Waiting Period.
The second last step may seem like the easiest step, but it is probably the most tedious of all. Step 7 – the waiting period begins. Some expert traders recommend turning off the screen and walking away from the market after the order has entered.
8.Step 8: Complete the Trade.
And finally, the trade is done! A trader's first trade can result in a profit or loss. After all, it should be seen as a learning experience.