In the world of investments, there are many ways to make money. Some are dull and only fit for certain personality types while others are exciting but highly risky. Of course, risk and return tend to move in the same direction, and therefore investors looking for high returns must be ready to take high risk. Forex trading falls in the exciting, but highly risky category.
However, the risk can substantially be minimized by having a deeper understanding of how the industry works and keeping updated on the latest developments.
In this guide, you will get an overview of forex trading and what you need to become a successful forex trader in South Africa.
1. What is Forex Trading?
Before we look at Forex trading, let us review how currencies work in the international market. Every day, individuals and institutions use fiat money to buy goods and services either locally or internationally. When operating globally, they must convert their local currencies to the target country currency to be able to transact.
Case in point, a businessperson in SA importing goods from China and is required to make payments in Chinese Yuan, must convert his SA Rand to the Yuan. In other words, they must sell the Rand to buy the Yuan.
Currencies fluctuate in prices depending on underlying fundamentals such as inflation, interest rates, political stability and government debt. These factors create demand and supply which in turn determines the direction that a currency takes.
For instance, if there is political instability in SA, foreign investors and business persons will not want to invest or do business here, and hence the demand for the SA Rand will go down.
The fall in demand means that the value of the Rand will decline relative to another politically stable and equally or more competitive country.
Forex trading, short form for foreign exchange trading, involves simultaneous buying and selling of currency pairs with the aim of profiting from the prices fluctuations.
For example, if one expects the SA Rand to weaken relative to the US dollar, they can sell the weakening Rand for the strengthening dollar.
Consequently, they will profit from buying low and selling high on the dollar and selling high and buying low on the Rand that is if they decide to repurchase it later when the prices hit rock bottom.
Unlike stocks trading, which mostly occurs in a centralized exchange, Forex trading happens exclusively over the counter. Forex is the largest financial market in the world with trades amounting to a staggering $5.1 trillion every day. The market is open 24 hours a day 5 ½ days a week from Sunday, 5 pm EST to Friday 5 pm EST.
In a nutshell, here are interesting facts about Forex.
- Forex trading mainly involves the seven most liquid currency pairs in the world.
- Speculators make up almost 90% of forex trading volume.
- The UK is the world biggest forex market.
- In every 10 forex traders, 1 is a woman.
- Globally, 1 out of every 786 people is a forex trader.
- 1/6 of all forex traders in Africa are from SA.
- 65% of all online forex traders are between ages 18 to 34.
Forex traders include banks, investment firms, hedge funds, and individual investors.
2. Forex Trading in South Africa
In the recent past, SA has been on the limelight for the increasing interest in forex trading. People are discovering that there are immense opportunities to make money in forex trading and are therefore flocking to brokers in large numbers.
The increased interest in forex trading has attracted both local and international dealers, most legit, and some fake. This means that a beginner trader who fails to invest in forex education is likely to be scammed.
While forex trading has its fair share of millionaires and billionaires in SA, it is not without “Nillionnaires.” On a lighter note, a nillionnaire is a person who makes nil money in an investment.
The recipe to becoming a “nillionnaire” in forex trading includes jumping in with both feet before learning, choosing a broker just because they have a sexy name, and wanting to join Forbes list of the world richest in the first day of trading.
Beginner traders should take advantage of available free learning resources on our website and around the web. It is important to note that paid resources are also available, but care should be taken to ensure that only the best are selected.
With the robust growth of Forex trading in SA, individuals claiming to be forex trading trainers are sprouting from every corner with unrealistic promises to beginners.
It is therefore paramount to vet a paid forex trading trainer before paying them to train you.
3. Becoming a Successful Trader
Like in any other parts of the world, anyone in SA with a stable internet connection and with capital as low as 100 Rand can trade forex.
However, to be a successful trader, you must consistently invest in learning by reviewing the many freely available forex trading guides and practicing through a demo account.
Contrary to what many beginners think, forex trading is not a get rich quick scheme.
Here are six steps to becoming a successful forex trader in SA.
- Improve your knowledge by reviewing as many freely available forex trading guides as possible.
- Get a trading mentor or trainer if possible.
- Practice your trading skills through a demo account.
- Open a live mini account with a reputable broker.
- Develop a trading strategy that is fit for you.
- Upgrade your trading account.
Each of the above steps is explained in details in our forex trading resources.
Beginner traders should put it in mind that forex trading is a high risk-high return form of investment and therefore they should not trade with money that they cannot afford to lose.
You can choose a broker either locally or internationally depending on what is convenient for you. Either way, reputable brokers can be found here in SA and abroad and therefore your choice should depend on what you are comfortable with.
It is important to note that when it comes to funds transfer, dealing with a locally based broker is easier than an internationally based one. However, this depends on the modes of transfer preferred by the individual trader.
4. Picking the Best Forex Broker
When it comes to choosing a new forex broker, beginner traders should conduct proper due diligence to ensure that they only settle for the best.
With the many Forex brokers in SA today, this can be a daunting task especially for those who do not know what and where to look.
Here are some the questions every trader should ask when choosing a forex broker.
- Are they licensed by a regulatory body?
- What are their transaction rates?
- How easy is it to withdraw funds from their trading accounts?
- Do they have a user-friendly and stable trading platform?
- Do they have a variety of accounts to choose from?
- How is their customer service?
In SA, the Financial Services Board (FSB) is the regulatory body responsible for licensing forex brokers.
Internationally, renowned regulatory bodies include the National Futures Association (NFA) and Commodities Futures Trading Commission (CFTC) both from the US. Others include FCA and PRA from the UK, ASIC from Australia, BaFin from Germany, AMF from France, and SAFE from China.
Regarding transaction costs, it is important to note that the cheapest brokers are not always the best. Traders should conduct thorough research both online and from peers before settling on a Forex broker.
5. FSB Forex Regulation
With the high number of scam artists today who are claiming to offer forex trading services, it is important for every trader to ensure that their broker of choice is certified.
In SA, the Financial Services Board is the regulatory body that ensures that all financial services are conducted in legit and transparent manner.
One can determine whether a forex broker is licensed by checking on the FSB website. A search on the website should also reveal whether the broker has been involved in scandals.
In case a trader experiences problems with a licensed broker, they can raise a dispute with the Office of the Ombud for Financial Services. Beginner forex traders should conduct thorough due diligence to determine if a given broker is synonymous with disputes.
Reading online reviews is a good starting point when conducting due diligence.
6. SARS and its tax implications on Forex Trading
The South African Revenue Service’s (SARS) treats profits from Forex trading as gross income and is therefore subject to income tax as per the Income Tax Act.
All expenses incurred from trading must be deducted from the gross income to determine the taxable amount. The income tax table provides directives on how different individuals should be taxed.
Every SA tax resident is required to pay tax on their worldwide income, and therefore forex traders must declare all their profits on their annual tax returns.
Also, a provisional tax must be paid in February and August of every year. It should be noted provisional tax is not an additional tax but just a method of paying the tax due to avoid paying large amounts on assessment.
In regards to moving money offshore for investment purposes, traders can deposit up to R1 million annually without requiring approval from SARS or SARB. With a tax clearance from SARS, traders can move abroad up to R10 million annually.
More details on SA tax requirements on forex trading can be found in our online resource library.
7. Getting Started
A million dollar jackpot winner once heard his friends boasting how they had tripled their savings through Forex trading.
So he went home, opened a live account with a random broker, deposited a big portion of his money, and made some random buy orders. In the next ten minutes, his account balance was wiped out.
Today, the man is a street sweeper somewhere in the inner cities of Karachi, Pakistan.
In Forex trading, action begins in learning. If someone tells you that you can start making money almost immediately with no background knowledge, they are lying to you.
The best place to start is to orient yourself with the basics and do some demo trading before you dip your feet into a live account:
STEP 1.) Open up a demo trading account with one of South Africas Best Forex Brokers.
STEP 2.) Educate yourself with all our free trading resources from In-depth guides to tips & strategies.
STEP 3.) Use your demo account too practice trading & implement what you are learning.
So How can RedHotFX help you?
RedHotFX is a leading forex trading portal developed to help beginner and seasoned Forex Traders get the most out of trading.
Our resources include trading guides, forex signals, and many more tips & tutorials.
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