Trading Safely in Forex in South Africa

Forex trading – the new hot thing in South Africa

Forex trading has emerged as one of the most exciting activities in South Africa. The internet and social media are replete with stories of “forex millionaires”, often peppered with pictures of luxury cars, palatial homes, wads of currency, and holidays in exotic locations. Type the word ‘forex’ and a million websites pop up, peddling a quick forex course as the dream road to riches overnight. In the past, it would have been easy to ignore such tall claims. However, real people standing on car tops are dramatic images that could drive the youth to forex trading, especially in a scenario of rising unemployment in the country. Amid all this hype and noise, it is pertinent to revisit the basics and provide a more practical view on forex trading in South Africa.

Thus, the moot question is, can you become rich through forex trading? The answer is not an unqualified ‘no’. There is no magic recipe or secret but you need to be aware of the fact that there are a number of qualifiers. Before you learn how to trade in South Africa in forex, you need to understand the forex market as well as the underlying South African economy that influences this market in the country.

Although the forex market does not receive as much media attention as the equity and bonds markets, it is the largest market globally with an average daily turnover of USD 5.1 trillion as of April 2016 – and the rand was ranked the 20th most traded currency. There is no one-stop shop for buying and selling currencies, and trade happens through various individual dealers or financial centers via electronic networks. The forex market is open 24 hours and five days in a week and currencies are traded worldwide across the global financial centers.

Historically, the governments, hedge funds, and companies with large exposure to the international markets dominated the foreign currency markets. However, the advent of the Internet saw the emergence of the retail trader. Today, all you need in terms of hardware to trade in forex is a computer or a smartphone.

Source: <a href="https://www.pexels.com/search/forex/" target="_blank" rel="noopener">Trading with a smartphone</a>
Source: Trading with a smartphone

A currency quote contains a bid price and an ask price, and a spread is the difference between the value of the bid and ask price of a currency pair.

Forex trading is legally permitted in South Africa and is regulated by the Financial Sector Conduct Authority, which oversees forex brokers and protects them from financial irregularities and frauds. A number of factors influence the movement of ZAR, often dubbed a “commodity currency” that takes cues from the prices of gold and platinum and other commodities, which form 60% of South Africa’s exports. A recent study conducted by the Bank of International Settlements on the currency behavior of 11 commodity-exporting countries, including South Africa, concludes that exchange rate movements can be predicted based on observed movements of commodity prices. This clearly endorses the fact that the ZAR is a commodity currency. A fragile economy and political uncertainty can also have a bearing on the ZAR.

Source:  <a href="https://pixabay.com/en/money-bill-note-south-africa-100-1227275/" target="_blank" rel="noopener">South African Rand - the emerging ‘cZAR’ in forex</a>
Source:  South African Rand – the emerging ‘cZAR’ in forex

Thus, as a new entrant into the forex market, you should tread with caution. While keeping in mind the economic and political factors, you should remember that fundamental analysis is the key. Traders seem to view ZAR as a relatively volatile currency and its average daily range can be much higher than other currencies. However, in terms of dollar pips (percentage in points), the movements are equivalent to an average day in GBP, making ZAR a great currency pair to trade against the USD. Observe key trends in sectors such as agriculture, food processing, automobiles, telecommunication and energy etc. It stands to reason that the ZAR will fluctuate if the health of these sectors is fragile. Given the ZAR’s affinity to gold and platinum, you should consider the commodity markets to take positions when economic data is limited. Finally, ensure that your dealer is registered with the Financial Sector Conduct Authority so that you are not a victim of a fraud. Unlicensed operators are acting in contravention to South Africa’s Financial Advisory and Intermediary Services Act. Keeping these factors in mind would help you to trade safely and profitably in forex in South Africa.