As explained on our homepage 24 Trade Forex, FOREX, also called The Foreign Exchange market or FX trading or FOREX, is one of the most liquid currency trading market in the world. In this article, we explain what is forex trading and how does it work.
With an estimated turnover of $5 trillion traded daily, this proves that FOREX is the biggest financial market globally. Forex trading is fairly simple. Learn forex trading with us and we promise to explain how to trade forex, help you understand stock trading, economic calendar and which forex trading app to use.
Trading forex is done online through internet where you buy and sell foreign currencies. There are thousands of Forex brokers on the internet who act as a link between you and the International money markets. Traders find it hard understanding how does forex work or if currency trading online really works. Most FX traders are still a little bit sceptical about foreign exchange.
Best Forex Trading Brokers in South Africa
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How to find forex trading sites
Finding forex trading sites is easy. Thanks to Google or the internet which makes it possible for people to find what they are looking for. You can just search “What is FOREX trading and how does it work?” or “currency trading”, “Forex trading SA”, or “Forex trading South Africa”, and trusted forex trading brokers will come up on the Google search.
After finding a forex trading site, you will be able to sign up and starting trading currencies. For example, you can sell USD dollars 200 to buy South African Rand (ZAR) online. However, you need to know how much money do you need to start trading forex.
How does forex trading work in South Africa?
Forex trading is fully dematerialized and decentralized and is not tied to any particular stock market. It allows transactions on currencies almost 24 hours a day every day of the week. Virtually all transactions are made over the counter: brokers and banks negotiate directly with one another without a stock market intermediary. Forex is therefore an unregulated market.
The main players in Forex trading are banks and brokers that allow individuals to trade online. They make available financial instruments to hedge or speculate on changes in currency rates. With online trading sites, it is possible to access the market via an exchange platform and real-time quotes. The broker’s remuneration is generally spread, which corresponds to the difference between the purchase price, called the bid price and the sale price, the ask price. Most brokers offer attractive forex bonuses to encourage trading, for example with double deposit amounts or other bonuses.
On forex, currencies are sold and always buy two by two: we are talking about pairs. For example, we can exchange South African Rand for US dollars. A simple way to get there is to position yourself on ZAR / USD pair. When ZAR / USD has a quotation of 14.3, we can: either buy 1 USD against 14.3 RAND (we say we buy the pair) either sell 14.3 RAND against 1.3105 dollars (we say we sell the pair).
The fourth decimal of the quotation is called the pip. Thus, when the quotation goes from 1.3105 to 1.3107, it is said that she has gained two pips. Conversely, when the rating goes from 1.3105 to 1.3103, it is said that she lost two pips. Indeed, the price of the currency pair is unstable and evolves permanently.
This allows you to make profits in two ways: either by buying the pair, and then selling it a few times later when its price has risen or we sell the pair, then buying it back some time later when its quotation has dropped. To make a profit, it is therefore necessary to know correctly anticipate the direction of evolution of quotations.
It should be noted that the ZAR / USD differs from the USD / ZAR pair and that they are subject to two separate quotations, while being closely related. Thus, if we have RANDS to exchange for US dollars, we can: or sell RAND by being paid in dollars. We then sell the ZAR / USD pair. If the ZAR / USD par value is 14.3105, then we sell 14.3 RAND against 1. dollars; or buy dollars by paying in RAND.
We buy the USD / ZAR pair. For a parity of 0.7632, we buy 1 dollar against payment of 14.3 RAND. The US dollar (USD) remains the reference currency in the currency market. In practice, a currency is always quoted against another currency that serves as a reference. The dollar can thus be quoted according to the South African RAND, EURO, Australian dollar, Canadian, British pound.
One of the key features of Forex trading is leverage: Forex brokers allow their customers to bet more money than they actually have on their account, so it’s called leverage. Thus, the leverage allows putting on the market a sum up to a thousand times higher than that which the customer owns but with a high risk taking. There are several levels of leverage, ranging from 1: 100 (the investment on a currency pair is multiplied by 100) to 1: 400. It is common to use leverage for Forex trading, as currency exchange rate movements are often very low and it would be very difficult to make a profit without this effect.
If your SA broker allows you a lever × 100, this means that for 100 Dollars deposited in your account, you can invest 100 × 100 = 10 000 Dollars. This technique makes it possible to dramatically increase your earnings if you have found the right trend. But it can also speed up your losses in the opposite case, and may even lead you to lose more than your starting bet. This technique is therefore reserved for the most sophisticated investors.
Forex trading currencies traded in pairs
After searching What is FOREX trading and how does it work, we came across some forex websites stating that all forex trading currencies are traded in pairs. Some of the most common traded currencies include:
- GBP – Great Britain Pound
- USD – United States Dollar
- EUR – European Union Euro
Since FX trading is the biggest financial market in the whole world, it comes with lots of benefits in which traders can benefit from. Forex has high liquidity, has suitable hours, as well as the ability to trade on margin.
Benefits of forex trading
Forex trading hours
The foreign exchange market opens 24 hours a day, five days a week. The trading hours start from 9pm Sunday to 10pm Friday (United Kingdom time).
Ability to go short or long
With forex, one can make the money whichever way the FX market shifts. The reason behind this is because forex markets involve selling more than one currencies. For example, if you think the USD is going to increase against the EUR, you will go long and buy the pair. However, if you think the USD will decrease against the EUR, you will go short and sell the pair.
Currencies have high liquidity
Forex currencies have the highest liquidity in the financial market in the entire world. High liquidity means that there are thousands and thousands of forex traders looking to make a trade anytime. Every-day, over $4 trillion is being traded online by banks, companies and individuals who are out to make profit. Also, transactions can be made fast and easily.
Volatility creates trading opportunities
The price movement of some currencies is exceedingly volatile. Forex traders can really make large earnings by guessing the movements of the prices. But also, you can lose lots of money if the price movement doesn’t favour you. There are online tools which will help you minimize the chances of losing your money.
Leverage helps traders go far
CFDs are leveraged, meaning you can make lots of money through it. According to our research, we discovered that leverage allows online traders to open a position and close it with just little money. Forex brokers also offer risk management tools which will help you stop losses and other important factors which might affect you.
Forex Trading Basic Terms
Knowing the right forex trading basic terms will help you become one of the best and successful forex traders in South Africa and across the world. Any forex investor who wants to trade currency must understand how forex works and the basic terms of the market. Below are some of the most important forex trading terms:
- Currency Pairs
- Forex Trading
- The Spread
- Forex leverage
- The Lot or the size of the contract
- Forex platforms
Who trades forex in South Africa?
Have you ever wondered who trades forex in South Africa? How to trade forex? What kind of forex trading platforms they use? Technical analysis of best forex traders attend forex training sessions? The central banks have the most weight on the formation of currency prices. A central bank provides money for the country where it operates and supply the money in the foreign exchange market. The most important players in the forex market are:
- The states
- Central Banks
- Other banks
- Hedge Funds
- Investment Funds
- Professional and Individual Investors
In order to understand forex, you need to understand that the relationship between the supply and demand in the market as the currencies always change. That is why forex trading beginners are advised to read forex trading tips, and sign up with forex trading demo app.
Understanding the South African Forex Market
The supply and demand model explains the formation of prices at no cost competitive market. The same formation is used in the South African FX market. When you buy a US Dollar, it means there’s more demand for it. Every-time you sell a certain currency, a surplus of supply is created, which presses down the price of money down. The impact of each purchase and sale on the forex market is directly comparative to the trading volume of each transaction.
Factors Influencing Forex
The forex market and currency prices are influenced by several factors:
- Interest Rates
- Economic growth rates
- The supply and demand of a currency pair
- Political, economic events and natural disasters