1. What is forex trading and how does it work?
Forex is a contraction of the words foreign and exchange, also abbreviated as FX. So, forex trading is the exchange of national currencies in a global marketplace called the foreign exchange market. Trading forex requires the acquisition (or buying) of one currency and – at the same time – the sale of another currency.
2. How to get started:
Once you’ve done all your research and you are sure forex trading is for you, you will need:
- A small amount of capital to get started
- A dependable forex broker
- A cross-functional trading platform
You will also need to stay on top of current events; economic insight is key to successful forex trading. At the beginning, you may also want to use trading signals to try out copy trading. This is a tactic used to follow the activity of successful traders, whilst you find your feet in the game. Use this to learn from the greats but be careful of using it as a “crutch”. It is key to know when to start copying and when to stop.
Build up your confidence with a free demo account for forex trading. You can test out strategies and make mistakes in a risk-free environment, yet, at the same time you will get accurate and realistic feedback.
3. What is a currency pair?
When you think about forex or currency trading, then you are speculating about the price of one currency compared to another. Therefore a currency pair refers to the two currencies you are trading.
The base currency is the first listed in the currency pair, and the counter currency is the one that follows. Let’s say you want to buy euros with US dollars, then you will acquire the EUR/USD currency pair.
4. How do currency markets work?
The forex market is supported by a global network of central banks, spread across different time-zones. Trades happen in an over-the-counter (OTC) market and directly between two parties.
5. What is a retail trader?
There are two basic types of traders: institutional and retail. The latter is sometimes referred to as individual traders, and they sell or buy securities for personal accounts. Institutional traders do the same, but for accounts they manage for institutions. Think exchange traded funds (ETFs), pension funds, insurance companies – these are all institutional traders.
6. What does CFD mean?
CFD is the abbreviation for contract for difference. It is a contract between two parties, generally called a “seller” and a “buyer”, specifying that the buyer will pay the seller the difference between the current price of an asset and its price at contract time.
CFD trading South Africa
CFD trading has increased in popularity and is about speculating on the possible increase or decline of a certain asset. CFD trading can be lucrative, but remember that the SA government taxes your income from trading.
7. Why do I need a broker for forex trading?
Before there were forex brokers, investors who wanted to trade in foreign currency needed large sums of money (and a good relationship with the bank). Nowadays you can still trade forex without a broker, but you will need extensive experience and quite a bit of money to deal directly with the bank. A forex brokerage is a financial services company that affords forex traders access to a trading platform where they can buy and sell foreign currency pairs. Each brokerage has its advantages and disadvantages, so it is important – as always – to do your research.
8. How is the forex market regulated?
When choosing a forex broker, it is important to understand the regulations that govern brokers. These regulations impact how brokers work with your money. In South Africa, brokers are regulated by the Financial Sector Conduct Authority (FSCA). But forex traders can choose forex brokers regulated abroad (see below) or not at all – the latter being extremely risky.
Some popular forex brokers are regulated by the Australian Securities and Investments Commission (ASIC). You may also come across the Financial Conduct Authority (FCA).
9. How much money is traded on the forex market daily?
The most recent estimation of the worldwide forex market worth is 2.409 quadrillion dollars. Every day an average of 6.6 trillion dollars is traded on the foreign exchange markets. In 2016, the Bank for International Settlements (BIS) conducted an analysis and found the worldwide forex market was worth $1.934 quadrillion dollars back then.
10. Is forex trading income taxable?
Forex trading is taxable in South Africa. Just like your regular income, any profits you make are taxable. How much tax will you pay? That depends on your profits and can range between 18% and 40%.