Forex Trading in South Africa – The Basics
Here are the basics you need to know in relation to Forex trading in South Africa. It would be a lot easier to understand how forex trading works by using simple examples. To illustrate, let’s say you bought $10,000 in February 2016 at the rate of 13.30 South African Rand for every US dollar. You paid 133,000 rand for the purchase. You held the dollars for half a year and decided to dispose of them in August 2016. The selling price was 13.36 for every dollar. You received 136,000 rand, making a profit of 3,000 rand for a six-month time frame. This is because you bought the US dollars at a lower price than the selling price you set.
You make profits from trading forex in this manner. In the example given above, you may have realized that you need to have US $10,000 just to earn about 500 South African Rand per month for 6 months. That is simply too much money and too much time. However, you need not worry because there are easy ways on how you can overcome these concerns.
Forex Brokers and Leverage
Trading in foreign currency is typically done with a broker. A forex broker is a specialized firm that paves the way to a perfect environment for forex traders to benefit from the currency changes in as short a time as possible. You can trade forex on international markets with large sums of money and gain profits within a short period of time by opening an account with a foreign exchange broker. This is possible through leverage.
By offering leverage brokers provide their investor clients the chance to trade large amounts of money. If your broker extends a leverage of 1:200, it means your $100 deposit will allow to trade currencies as much as $20,000. Now, you may be wondering why your broker will allow this.
The answer is simple. The broker understands very well how slowly currency markets can move. For a trader to earn considerable amounts of profits within a short time frame is to trade a huge amount of money.
Let’s use another example to better explain why your broker will offer leverage to you. The world’s most popularly traded currency pair is the EUR/USD pair. Currently, the EUR/USD rate is 1.1011. This means that each EURO will cost you around US $1.1011.
If you buy 10,000 Euro through your broker at the current rate, and sell them after 48 hours at 1.1011, it means there is a 100-pip difference or a 0.9% movement that occurs in a period of 48 hours.
With this trade, your profit would be exactly $100. Note that one pip for the EUR/USD pair is equivalent to 1 dollar when you trade 10,000. The 4th decimal in the exchange rate is the pip.
The broker is aware that while you earned a 100 US dollar profit in a matter of 2 days, his risk is likewise limited to a 2-day time frame. Even if the trade goes south and he loses money, he will not lose a significant amount of money. Assuming the trade resulted to the opposite, his total loss would only amount to $100.
It is obvious why your broker would be willing to let you purchase 10,000 Euro with only a $100 deposit in your trading account. If the worst thing happens and the loss wipes out you entire deposit, your broker will close the trade automatically, effectively limiting the loss only up to the extent of your deposit.
To sum it all up, leverage is offered by brokers to encourage traders to take on bigger risks with the potential of making much bigger profits within short time periods by trading a bigger amount of money.
If you trade more, your broker potentially earns more as well. This is because of what is known as the spread. To explain in simple terms, a spread is the difference between the price to buy and sell a currency pair.
The great thing about it is than in forex trading, spreads are extremely low. This is because the spreads are forced down by the fierce competition among the many foreign exchange brokers. Simply put, low spreads are intended to lure many potential clients in.
3 pips, typically, is the spread for the EUR/USD pair. This means that only $3 is charged by the broker for a trading position worth 10,000 Euro. In the example we used above, where the trader earned a profit of $100, the forex market moved up by 103 points. This allowed the trader to earn $100, while the broker netted a $3 profit through the 3-pip difference between the buying price and the selling price.
Foreign Exchange Brokers in South Africa
While there are, unfortunately, no reputable forex brokers in South Africa, traders still have a viable option to take advantage of the earning potentials offered by the forex market. That is to make use of the services of a foreign-based or offshore forex broker. The good part is, there are numerous international brokers that are willing to work with South African traders.
There are international brokers that allow you to open an online account in as fast as 5 minutes. You can make a deposit using your debit card or a number of online payment options including Webmoney, Skrill, Neteller, Paysafecard, Cash U, and others. You also have the option to make bank transfer arrangements if you opt to make bigger fund withdrawals or deposits.
I have already checked out the biggest foreign exchange brokers all over the world, and have listed the ones whom I think are most favorable for South Africans. These companies offer the best trading environments and the most convenient withdrawal and deposit methods.
Here are my choices for the best foreign exchange brokers for South Africans (updated 10 September 2018):
Top Forex Broker for South Africa
It is worth mentioning that these brokers all offer high leverage, low minimum deposits, mobile trading, and very contemporary trading platforms. These brokers likewise have a lot of educational materials that you can use to learn everything you need to know about forex and how you can make a significant amount of money from trading online.
Read more: How to Choose a Forex Broker?