Table of Contents
So you have decided that you want some type of extra income without having to leave your house. After days of searching online, trying to do some small tasks and maybe getting a freelance job that you have a knack for, you encountered trading, and more specifically Forex trading. You may have even encountered some ads concerning the topic and got interested. Luckily for you, we’re all about online Forex trading here, so all of the information you’ll need is provided.
Online Forex trading can be a confusing thing to understand for a beginner. Even some of the most seasoned traders are sometimes confused as to how the trading actually happens, where it happens and why it happens. Therefore we have decided to go to the very beginning of Forex trading, of the Forex market even, and help you understand how online Forex trading works.
First things first, we need to differentiate between Forex trading and the Forex market. For example, if I were to only explain Forex trading, you’ll still be confused as to where it happens and what allows it to happen. Therefore we will start with a comprehensive discussion about how the Forex market functions and what it actually is.
Beginners in the Forex market shouldn’t find it to be much of a mystery. The term may be something new but the fact is that you’ve most likely participated in a trade. However, there are still differences between an online trade and an offline one. Let me tell you a story to put Foreign Exchange into better perspective.
Let’s imagine that you are now bored of staying in South Africa for so long and decide that you want to go to Europe on a holiday. You pack your bags, create a plan of which cities you’re going to visit, buy an airplane ticket and are prepared to go immediately. You board the plane, it takes you multiple hours to arrive in, let’s say Paris.
However, the moment you arrive you find out that the population in France doesn’t use the South African Rand as their base currency, they use the Euro. This means that you need to conduct a Foreign currency exchange. What you’ll need to do is go to an exchange booth, hand in your South African Rand and receive Euros that are equivalent to it. Let’s say you decided that your budget is 15,000 ZAR, this would get you about 900 Euros. Congratulations, you just participated in the Forex market. You took the ZAR and exchanged it to EUR, that’s basically how it works for individuals like you and me.
There are two types of Forex segments in the world right now. Online Forex trading can be both, but it depends on who is conducting the trade. Let me bring this more into the light. If you, an individual start to trade Forex online, you will be considered a Retail Forex trader. If a large corporation or a bank does it, they will be considered as an Institutional Forex trader. The difference is mostly in the volumes we trade. A typical trade made by a Retail Forex trader is about 15,000 ZAR, but in most cases, they use special features from their middleman, features that we will discuss soon. For Institutional Forex traders the volume of tradeable sums can be in the millions or even billions of ZAR, that is the main difference. Another difference is the middlemen we choose to do our trades, let’s discuss them as well.
So you’ve finally decided that you want to start online Forex trading but can’t seem to find where to start or where it happens. You’ve probably heard the term broker before. Brokers are financial companies, licensed by your local financial regulator, for South Africa, it is FSCA or FSB with their old name. These companies are the ones that give you the ability to trade online. Ok, let me bring explain this a little more. When you start trading, you are basically trading one currency for another one. Meaning that when you engage in the ZAR/EUR currency pair trade, you’re either buying ZAR or selling it.
Let’s return to your trip in Paris and try to see it more clearly from there. So you’ve already bought some Euros at the local exchange booth. You traded in 15,000 ZAR and got 900 EUR. You have decided that you will remain in Europe for about 3 weeks. During your stay, you spend some of these Euros, but you’re also able to make some as well. At the end of your trip, you still end up with 900 EUR, which means that even though you spent some of your money, you were still able to make some to compensate. Anyway, it’s time to go home, but remember, you can’t really use Euros in South Africa, you’ll have to return these 900 Euros and get the Rands from the exchange. So you stroll happily to the booth, thinking to yourself “Wow, I’m so good with money, I basically didn’t spend anything on this trip”. You hand in the 900 Euros, expecting to receive your 15,000 ZAR back. But what’s this? You actually get 16,000 ZAR back. Surely the cashier made a mistake right? No, this is not the case. You see while you were traveling around Europe, enjoying your stay, the currency prices were not standing still. When you came to Paris the 1 Euro was worth 16.50 Rand, but after these 3 weeks, the price decreased on the Rand, making 1 Euro worth 17.7 Rand. So now you’re even happier, you just made some money without even doing anything! This is basically what people do when they are trying to make a profit with online Forex trading in South Africa, but let’s get back to the real world for now.
You may be thinking “I have to go to Paris to make Forex trades? Isn’t it called online?”. Yes, you’re right, it’s called online Forex trading, not offline. Which means that no, you don’t have to go to different countries or even banks to make your Forex trades. This is where you use the services of online Forex brokers we mentioned. These companies allow you to buy and sell currencies online without having to leave your house. But there’s a trick to them, their services cost money so in most cases the prices would be a bit different compared to if you went to a bank. However, the comfort of staying home and making money still keeps them relevant.
So basically there you go, that’s how online Forex trading works for retail traders. You sign up with an account on one of the Forex brokers’ platforms. You engage in a currency pair trade, and rest is just analyzing, learning and making predictions. One thing to consider here is how the trades are made. Basically, when you’re buying some EUR, you’re paying with ZAR. This means that there needs to be someone actually selling EUR for ZAR so that you two are matched. But thanks to the size of the Forex market, there is usually not even a second of delay. In most cases, the traded volumes are so small with online retail Forex traders that, Forex brokers allow the trades to be made within their platform, meaning that you won’t be buying from the general market, but from the broker themselves. Usually, this is frowned upon, but directing small trades to the Forex market can prove more costly than profitable.
Now that we have discussed how the Retail segment of online Forex trading works, we need to discuss the larger segment, Institutional Forex. It is the segment no average or beginner Forex trader will be able to join You see the market is quite large, about $7 trillion in daily trades to be exact. Yes, trillion with a T. But the fact is that the retail segment is just a small fraction of the market, about 5.5%. The rest 94.5% of all Forex trades happen on the institutional level. This means that companies and banks are the ones doing most of the trading, however, it is rare to see somebody do it for the profit, it’s mostly done out of necessity. Let’s bring an example to try to illustrate it in a better way.
Let’s imagine that you now have a company that produces building materials. Your company is located in South Africa, therefore most of your income and expenditure is done in ZAR. Now let’s imagine that a Japanese construction company is looking for partners from abroad to buy those building materials, you two get automatically matched. After the discussion, the Japanese company decides to buy about $1 million worth of building materials from you. It’s a large sum so you’ll need to use the services of both Japanese and South African banks. But there is one condition you have, you MUST be paid with ZAR, otherwise, the deal will flop. What will the Japanese company do? Simple, they will use the Foreign Exchange module, here’s how it goes.
The Japanese company goes to their local bank, they give the bank $1 million worth of yen. After receiving that yen, the bank will convert it into USD and send it over to the Central bank of South Africa. Then you can cash out that $1 million in ZAR, simple right? But why does the Japanese bank need to convert the Yen into USD? Can’t they just immediately send over the ZAR? No, they can’t. You see the way online Forex trading works for institutions is that they need a third party currency. Not every bank has a reserve of every currency in the world you see, however, they do indeed have lots of Euros, US Dollars and GBP, all the major ones basically. Therefore they choose an intermediary currency for the transaction, in order to make it easier.
The Central bank of South Africa does not have some type of favorite major currency it uses as a third party, however. But in most cases, they do indeed use either the USD, EUR or GBP, as they are the most abundant in the treasury. But a lot of attention is needed for them because if too much is taken out of the bank, the ZAR will suffer relative to that currency.
Now that we have squared away all of the Forex segments and you have a basic understanding of what it is and how it works, let’s now discuss why it is a good idea to actually get into trading Forex online. Take these at face value as there are different reasons people start trading, I’ll mostly talk about the experience and the rewards you can reap from it.
When you start trading Forex, you get exposed to a lot of financial and economic terms, which in the beginning I must admit is very easy to get confused by. However, the more time you dedicate to learning the craft, the more benefit you’re going to receive. So what is the primary skill that online Forex trading will teach you? Economics is the easiest answer.
“But economics isn’t a skill!” you may say, and I’ll have to disagree with you. Economics is pretty much the best skill you’ll ever have. Well, understanding economics that is. Pretty much all of your financial life is dependant on how you can a) Handle money, b) use the opportunities presented to you and c) Increase the money you already have. By being exposed to a lot of financial aspects of the world, you’ll start understanding how the richest people make their money, where they get their information and how they capitalize on that. The more you understand economics the easier it will become to see an opportunity to become a successful Forex trader. For example, let’s say that the government just announced that they’re going to decrease the national interest rate, this would be nothing too comprehensible if you were not educated enough in the field of economics, but if you do indeed know enough by online Forex trading, you’d be able to act on the opportunity.
Let’s say that the Central bank of South Africa has decided to decrease the interest rate nationwide. This means that the 100,000 ZAR you have on your bank account does not get that additional 5% every year, they now get 3%. This means that it is not worth it to keep the money in the bank anymore, you can take it out and start online Forex trading or invest it somewhere else. Since everybody starts to withdraw, the banks are not able to give as many loans as they used to, therefore you can guarantee that the economic growth is going to slow down. The investments in infrastructure and commerce are going to slow down as there is no money to be had from the banks, but from the individual standpoint the people will indeed have more money on their hands but may start investing somewhere else. All of these little issues are very important to know, especially in South Africa as the ZAR is quite volatile and a mass withdrawal can trigger some serious exchange rate issues.
Another reason why you should immediately start trading Forex online is the extra income you’ll be able to generate without having to leave your house. We all get tired from our full-time jobs, especially when our income is not solely dependant on our merit. Let’s look it from this standpoint. At this moment according to national statistics, the average salary here is about 240,000 ZAR in the non-agricultural sector. While this is amazing compared to rest of Africa, in the global terms it is terrible. Jobs are hard to get SA already and getting one that pays an average salary is already a great achievement. Increasing that monthly income is always nice, but not always possible. Plus there is never a guarantee that the SA government doesn’t implement something that ruins some businesses, therefore the jobs are not entirely secure.
With Forex trading it is more than possible to make ZAR 250,000 + from your house. However, it will take some time to learn it. What’s even better is that the economy will most likely not affect you too much, as if something happens to the ZAR, you will have some foreign currency stockpiled on your account. In terms of economic safety online Forex trading in South Africa is also a plus.
But how do you make a living with Forex trading? What is the 100% success strategy? Unfortunately, there is no 100% success strategy. If there was, I wouldn’t be sitting here writing this, I’d be trading all day and night becoming a trillionaire. All that success takes in Forex is:
These 4 are pretty much what will get you through some of the toughest of trades, as in most cases, Forex is directly connected to psychology.
As I’ve already mentioned, online Forex trading from home is possible. But how is this possible? Aren’t there special buildings where exchanges are made? Aren’t those the ones you see on TV? Well, yes there are special buildings for exchanges, like the New York stock exchange, where people work and process all of the trades. But you need to understand the fact that these buildings are solely devoted to stocks. Forex does not have a centralized location where all of the trades are being processed. This means that there is no specific time-frame for trading Forex in South Africa, it can be done all day every day (besides weekends). With stocks, it depends on the stock exchange closing down for the day as people finish their work times and go home, during those times it becomes impossible to trade and you have to wait.
So we already know that Forex can be done 24/5, but what does this mean for a South African like you and me? Well, there is this edge that we’d have with Forex. In terms of stocks, there are not many companies listed at our stock exchange, not big ones for that matter. Most of the profitable stocks are located either in the UK, the USA or in Hong Kong and Japan, therefore we have to adjust our trading times to those time zones. With online Forex trading, that is not the case as we can do it whenever we want. So when you come home from work, you won’t have only 1 hour remaining to trade, you’ll have as much time as you want before the weekend.
Like anything else in this world, Forex comes with its advantages as well as its disadvantages. Since we’ve already listed the advantages, let’s now look at some of the aspects that may be a deterrent for a person like you or me.
The risk that is connected to online Forex trading cannot be denied. Pretty much everything connected to money comes with its risks and Forex is no exception. If you’re likely to make a profit, you’re also likely to lose all of your investments. This actually creates a big buffer zone between the Forex market and the potential trader. We as humans prefer avoiding losses rather than chasing profits, therefore it’s sometimes hard to convince yourself to risk a loss, even if there is a profit waiting right there.
Not to mention, there is a fair share of scams floating around the Forex market. Scams that need to be avoided or at least spotted before it’s too late. For that, I’d advise you to look at the broker reviews and all of the comments that people leave about a company. In most cases, you’ll be able to avoid these scams with just a small glance, but it is advisable to read a guide for beginner Forex trader, it could be quite hard. Luckily for you, we do Forex broker reviews here on our website, exclusively for the ones that are located within South Africa. By reading those reviews you’ll not only find out about the true identity of some of the brokers, but you’ll also learn how we rate them.
So we have already found out how the trading works with retail investors as well as institutional investors. I’ve already mentioned that starting out happens when you register with a local Forex broker, but there are so many details and procedures connected to that activity, it’s hard to list them in this already large article.
There are multiple ways you can start trading Forex online in South Africa. But all of them require quite a lot of analysis and going into detail. Luckily for you, we’ve already made that article and you can give it a glance.