BUSINESS NEWS - Forex trading involves the buying, selling and exchanging of currencies. This is what determines the exchange rate between different currencies. The forex market is the largest financial market in the world with over $6.6 trillion of daily trade volume as per BIS data.
The total number of forex traders in the world were estimated to be over 13 million in 2017, out of which over 2 million traders were reportedly from Africa.
Among all African nations, South Africa is leading in terms of both - number of forex traders and daily trade volume which is 190,000 and over $20 billion across all forex instruments, respectively.
One of the most impactful factors contributing to the popularity & growth of online forex trading in South Africa is the presence of local market regulator FSCA or the Financial Services Conduct Authority. The FSCA regulates retail forex trading in South Africa and ensures the safety of traders from scams, frauds and other security challenges.
We have listed the steps to open an online forex trading account, important considerations that you take into account before investing and the common mistakes you should avoid making.
5 Steps To Open a Forex Trading Account
Below are the steps involved in opening a forex trading account:
1. Compare and Select a Regulated Broker
This is the most important and time-consuming step in opening an online trading account.
To select a broker of your choice, you must compare brokers based on the following points:
Broker’s Regulation(s)
Proper regulation and oversight of financial entities by regulators translates to high security. There are dozens of Financial regulators around the world which are often divided into three tiers based on trust. These are:
- Tier 1 Regulators - These are most respected and highly trusted across the world as they have strictest policies, restrictions and standards of security of investors. These are Financial Conduct Authority (FCA) of United Kingdom (UK), Commodity Futures Trading Commission (CFTC) of The United States, Australian Securities & Investment Commission (ASIC) of Australia and Investment Industry Regulatory Organization of Canada (IIROC) of Canada.
- Tier 2 Regulators - These regulatory institutions have somewhat lower restrictions & requirements for brokers as compared to Tier 1. These include Cyprus Securities & Exchange Commission (CySEC) of Cyprus, Financial Services Conduct Authority (FSCA) of South Africa, Central Bank of Ireland (CBI) of Ireland etc.
- Tier 3 or Offshore Regulators - These often have lowest security standards as compared to Tier 1 or Tier 2 regulators and they provide license to most entities based on small investment. You should avoid brokers that are only regulated by tier 3 regulators.
Always try to go for a broker that is regulated by multiple tier-1 and tier-2 regulators. If a broker is regulated by more than one regulator, then it is better. For safety of funds, South African traders should only choose FSCA regulated brokers or brokers that are regulated with Tier 1 regulators.
Deposit Methods
Most brokers offer a range of deposit and withdrawal methods - including bank transfer, credit/debit cards and online wallets/platforms like Neteller, Skrill, and Paypal.
You must identify a suitable deposit method and crosscheck the brokers based on it. Like you may want ZAR account option if you prefer local bank transfer in South Africa. This will ensure seamless transactions during deposits & withdrawals.
Range of Trading Markets
Before choosing a broker, decide on which currency pairs & instruments you want to trade with like – USDZAR, cryptocurrencies or stocks. Choose a broker that supports your choice of instruments.
Trading Tools
Trading tools facilitate smoother and automated trading. A Good Broker should offer them to you.
Some of the trading tools you should look for are:
Economic calendars: Broker must provide list of all past events that have affected the market.
Live forex news: Broker must notify you immediately of any news that can affect the markets.
Calculators: Broker must offer pip calculator, margin calculator, currency converter, profit/loss calculator.
You should evaluate the brokers on trading tools they offer and also check if they’re offering the same for free.
Account Types Offered
Most brokers offer the following types of account, which you can choose based on your trading volume and needs:
Standard accounts
ZAR accounts
ECN accounts with Direct Market Access
Fees
There are two methods in which a broker may charge you:
Commission on total amount of the trade, charged per trade.
Spread: Difference between the price at which the broker buys the currencies and the price at which they sell it to the traders.
Apart from above, there are also various types of fees that a broker may charge. Some of the most common are:
Overnight Fees: charged on positions that remain overnight.
Inactivity Fees: charged on an account that doesn’t record any transaction over a specified period of time.
Account Maintenance Fees: usually charged on an annual basis, for the maintenance of your account.
Once you have listed the brokers down based on the above-mentioned points, all that’s left to do is compare them and select the broker you find most suitable.
2. Sign Up With The Forex Broker You've Chosen
To sign up with a broker, you have to fill out an application form— based on the account type of your preference.
Almost every broker has a digital form that you will need to fill before you get a trading account with them. You will be asked to fill information about your existing trading experience, source of income etc. Normally this process takes a few minutes.
3. Complete The Verification Process
After you submit the application form, you've to go through the broker’s verification process.
In most cases, you would be required to submit valid photo identification and address proof to complete KYC (Know Your Customer). The broker may take some time to verify your documents, normally from 24-48 hours.
4. Deposit Funds in your Trading Account
Once your account has been approved, you will receive your credentials (User ID and password) through an email.
Use these credentials to log-in to the client portal of the broker and deposit funds for a Live Trading account. Or you can also create a demo account for gaining trading experience.
5. Download the Trading Platform and Start Trading
After funding your account, you have to download the trading platform of the broker and start trading.
New traders are advised to demo trade to test the trading platform, strategy before investing any money.
Common Trading Mistakes You Should Avoid Making
Here are the most common mistakes that beginner forex traders should avoid making:
Investing without Education: The first step before you start online trading of Stocks or Forex or CFDs is to gain knowledge about the concepts of trading & investing. Learn about the risks, and gain experience on demo before investing any money.
Using High Leverage: Most of the online brokers offer Margin trading. Using leverage you can trade more than your deposited capital, but this puts you at risk of losing big in case of a losing trade. So understand the risks for leveraged instruments, and never use more than 1:10 leverage.
Adding to a losing trade: If you're losing a trade, withdraw and re-invest. Emotional bias will only make you lose more.
Trading without stop-loss orders: A stop-loss order automatically closes your trading position if your loss exceeds a certain limit. It is essential, especially if you're unable to check your trades frequently throughout the day.
Anticipating price movements: While you should anticipate a loss and withdraw your investments accordingly, you shouldn't trade based on expected price changes. Wait for the news to hit before you start investing.
Going all in: Never, ever do this— no matter how good the opportunity is. It's the surest way to lose all your money. Learn about risk management before investing.
Trading without a plan: Forex & CFD Trading is more complicated than other instruments, and so can tracking your investments be if you invest haphazardly. Devise a trading plan with a proper risk management strategy and evolve the plan steadily as you gather more experience.
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