BUSINESS NEWS - Forex trading has been becoming more and more popular around the world among retail traders. 

Africa too has seen sizeable growth in retail trading demand for CFDs and Forex in recent years with South Africans leading the demand. There is an increase in number of SA based forex brokers offering CFDs and Forex in the last five years to 30+ brokerages.

According to Safe Forex Brokers SA, “The reasons for forex trading growth in Africa can attributed to increased penetration of the internet, low fees & low capital requirements by most online brokers and huge marketing by brokers.”

“On top of that Online Forex trading allow traders to take advantage of leverage or borrowed capital offered by forex brokers; this attracts a lot of new traders to online forex trading world. This leverage allows online traders to make profit from little movement in currency pairs but this can at the same time also cause losses if not used properly.”  

Forex trading can be highly risky business especially for new online traders as they commonly use high leverage in their trades which can magnify their losses. Currency pairs often fluctuate wildly on a daily basis, and it is likely that new traders will lose money on their trades. Around 60% of forex traders lose money rather than make money which is a widely reported fact in this industry.

Keeping this in mind, here are 8 factors that you need to consider before diving into the world of forex trading.

Currency Pairs to Trade
The first step to trading forex is to decide which currency pairs you will trade. It is best to choose only a few currency pairs to focus on. This is because each currency pair has its own relationship with the market, and you need to understand that relationship if you want to trade that currency pair successfully.

The movement of each currency pair is driven by a few important factors. It is essential to understand these factors before starting to trade. For example, the movement of the USD is driven by the interest rate set by the Federal Reserve, international trade which the US takes part in, and overall demand and supply of the currency.

Once you understand why each currency pair moves the way it does, it becomes much safer and more profitable to trade that currency pair.

Hence, when starting out, just choose one popular currency pair to learn and understand.

Spread  
The spread is the difference between the bid price and the ask price.

The bid price is the price at which you can go long on a currency pair. While the ask price is the price at which you can go short on a currency pair.

There is always a certain difference between the bid price and the ask price, the difference is the profit which the forex broker and other functionaries are going to take home.

The higher the spread, the less profitable a trade will be for you. Hence, you should always seek to trade currency pairs that have a low spread, and also choose trading times during which there is high liquidity in the market (which will mean that the spreads will be tighter).

Also, each forex broker offers its own spread. You should compare the fees charged by different brokers and sign up with the broker that charges the tightest spreads for the currency pairs that you want to trade.

Leverage 
Forex brokers offer leverage on currency pairs. Leverage is the ratio of the money that you need to invest to enter into a trade versus the size of the holding that you get. For example, if leverage is 1:100, that means that for every $100 that you invest, you can open a trading position that is worth $10,000.

Leverage allows you to trade currency pairs in much higher quantity than you would otherwise be able to. This means that the potential of profit or loss is also much greater.

Leverage makes forex trading more risky. You can lose a lot of money in a very short period if you make a wrong trade. However, the flipside is that leverage can also provide much higher profits.

Hence, every trader needs to carefully consider how much leverage they will use for their trades.

Trading Strategy
Every trader needs a trading strategy. The trading strategy consists of which technical indicators you will rely on, which currency pairs you will focus on, what will be the timing of your trades, what kind of leverage you will use, what will your risk management techniques will be, and so on.

The trading strategy can be the difference between a successful trader and a failed trader.

You should consult or learn from expert forex traders to develop a trading strategy that works for you. 

Goals
As a forex trader, you should have financial goals. What is the purpose for which you are trading? How much do you aim to earn in a month or in a year?

Having goals attached to your trading will help you decide your risk appetite and capital needs.

If your goals are more reachable, then you do not need to take big risks. If your goals are highly difficult, then you may need to take a few big risks.

Remember to invest only an amount that you can afford to lose.

Local Regulations and Safety 
The financial authority of South Africa is the Financial Sector Conduct Authority (FSCA). The FSCA licenses and authorizes forex brokers to operate in South Africa.

As a South African forex trader, you should only trade through brokers that are licensed by the FSCA. This is because licensed brokers are held accountable by the financial authority. Without this accountability, there is a much higher chance of unscrupulous practices being conducted by the broker.

If a broker is licensed by the FSCA, it is considered to be safe for traders to trade through them. In the absence of a license, you will have no legal recourse against any wrongful act committed by a forex broker.

Further, you should try to trade through a broker that has a local office in South Africa.

Risks 
Risk is part and parcel of forex trading. Successful forex traders understand the risk that they face and take steps to manage it. One of the most popular ways of managing while forex trading is to have a stop-loss for every trade. However, there are many other ways as well, such as using lower leverage.

You should have your own risk mitigation methods before starting to trade forex. These risk mitigation methods can help you avoid losses or cut down on losses while allowing you to maximize profit.

The price movements of currency pairs on a daily basis cannot be reliably predicted by anyone. Hence, you should be very careful of how much money you invest in your trades.

Emotions and Bias 
Trading can be an emotional activity. Since you are risking real money, emotions can run high with each trade.

However, successful forex traders know that emotions are a deterrent to proper forex trading. Emotions can get in the way of cutting your losses and maximizing your profits.

Timing is everything in forex trading, and emotions can interfere with the timing of your trades.

Hence, it is important to practice calm and mindfulness while forex trading and not let emotions and bias get in the way.

Before you start..

Forex trading can be profitable for experienced South African traders, however, it does come with its risks.

The first step should be to learn the ins and outs of forex trading before you begin. A great way to start forex trading is to open a demo account with a broker so that you can practice without having to risk real money.

Remember to only register with a broker that is licensed by the FSCA.

We hope that you have found this article helpful.

Article supplied by Safe Forex Brokers SA