Forex Trading is regulated in South Africa by the Financial Sector Conduct Authority (FSCA). The Financial Sector Conduct Authority (FSCA) is the statutory regulatory body that oversees financial markets including the forex market in South Africa. They also issue licenses to market participants like the forex brokers that accept retail traders.

For ensuring that your funds are safe, traders in South Africa must only trade via FSCA regulated CFD & forex brokers.

Steps to start Forex Trading for beginner traders in South Africa

Below are some of the points that you need to know for learning everything about forex trading:

  1. Forex Market Definition
  2. Currency Pairs
  3. Forex Trading Terminology
  4. How to Open Forex Trading Account
  5. Risks Involved in Forex Trading

Also, it is important to understand that forex & CFD trading is very risky, and almost 70-80% of retail traders lose their money when trading at different CFD brokers in South Africa. Hence, if you are thinking about trading forex, then you must learn about the risks as well.

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Summary & Comparison of Best Forex Trading Platforms in South Africa

Broker Regulations EUR/USD Spread (pips) Min. Deposit Visit
FSCA, FCA, CySEC
1.3
$5 or R70
Visit Broker
FSCA, FCA, CySEC
1
$10
Visit Broker
FSCA, FSA, FSC, ASIC
0.9
$100
Visit Broker
FSCA, CySEC, FCA, FSA
0.6
$100
Visit Broker
FSCA, FCA, CySEC
2 to 2.4
$10
Visit Broker

XM Trading

FSC Belize
1.6
$5
Visit Broker

Forex Market Definition

The foreign exchange market alias forex or FX market is a global, online over-the-counter (OTC) market where currencies of about 170 countries are bought and sold. It is open 24 hours a day. It is the biggest financial market in the world and has very high liquidity.

According to the Bank of International Settlement (BIS) survey conducted every three years, South Africa accounts for about 0.3% of forex turnover globally. The forex market participants include businesses, banks, speculators, institutions, etc.

Most of the trading is from banks, businesses & institutional investors. Some of the tradings in the forex market are speculative in nature, and a part of it is from retail traders. Retail traders come to the forex market to speculate, hedge against currency and interest rate risk, etc.

The activities that take place in the forex market are what determine the exchange rate of any currency pair. The higher the demand for a currency, the higher its exchange rate.

Forex market participants

The forex market ecosystem teems with a lot of participants. Let us discuss some of them.

1) The forex broker

The forex broker is a regulated participant who acts as a bridge between the forex trader and the market.

The broker is a middleman who places buy and sell orders for retail traders and some brokers also offer research services as well if required by the trader. The forex broker charges a fee for their services.

That being said, retail traders need to pass through a forex broker that accepts retail traders if they are to access the market. There are several forex brokers in South Africa to choose from.

However, traders in South Africa should check the FSCA website for a list of regulated forex brokers to avoid patronizing fraudulent/scam brokerages.

There are two types of brokers. They are classified based on their execution model. Here is the breakdown

Forex & CFD Broker Classification

Dealing Desk Broker: Dealing desk brokers take the opposite side of your trades. When you buy a currency pair, they sell. When you sell, they buy. Because of this, when you lose a trade, they make money off it, leading to a conflict of interest. This is why traders tend to prefer non-dealing desk brokers.

Dealing Desk brokers are also known as market makers.

Non-dealing Desk (NDD) Broker: NDD brokers do not take the opposite sides of your trades and they are divided into two. There are NDD brokers that use computerized networks to connect you to buyers/sellers in the market. This type is referred to as an ECN broker.

The second type is the STP brokers. They connect your trades to buyers/sellers via their liquidity pool.

2) The Retail Forex Trader

Retail forex traders are individual investors who wish to trade in the forex market for personal gain. They don’t trade on behalf of an organization or company. They account for an estimated 5.5% of the global forex market as per BIS data.

Retail traders are in the market mostly for speculative reasons. They hope to profit from differences in exchange rates between currencies.

3) Central Banks

Their presence in the forex market is to create policies that can affect the currency, intervene and stabilize the currency through increasing or decreasing interest rates, performing Open market operations in some situations, etc.

Central banks can also devalue their currency to make exports of their country more competitive to international buyers. In short, the Central bank plays a major role in deciding the value of a currency.

4) Commercial Banks

Commercial Banks make up the interbank market where they trade forex with other banks in very large volumes. These volumes are large enough to dictate the bid and ask prices for any currency. They trade on behalf of themselves and their customers.

5) Multinationals

Big companies that operate in different parts of the world have to trade in the forex market to hedge risk and also for business purposes.

A company hoping to buy raw materials from another part of the world may need to convert its currency to be able to pay the supplier at the other end.

Big companies that have business operations in other parts of the world may also want to convert and repatriate their profits in a stronger currency to hedge against the risk of currency depreciation.

Forex Market Time Zones

The forex market operates in four different time zones:

  1. Sydney (10pm GMT to 7am GMT)
  2. Tokyo (11pm GMT to 8am GMT)
  3. London (7am GMT to 4pm GMT)
  4. New York (12pm GMT to 9pm GMT)

Depending on the currency that you want to trade, some sessions can be better than others. Most of the trading is carried out in the London & New York sessions.

The best time to trade the majors is when some of the major sessions overlap. At this time, market participation and liquidity are high, and spreads are at their lowest.

For example, the ideal time to trade the GBP/USD currency pair, is during the London & New York sessions, because at that time liquidity in the market is highest.

If you are trading JPY-based pairs, then you will also find liquidity during the Asian session.

Currency Pairs

All the countries participate in the forex market and their currencies are represented as three-letter codes.

However, we will focus on the popular currencies here. The popular currencies and their codes are listed below.

  1. U.S Dollar – USD
  2. Great Britain Pound- GBP
  3. Euro- EUR
  4. Japanese Yen- JPY
  5. Swiss Franc- CHF

Forex Currency Pairs

Forex currencies are traded in pairs written as Base Currency/Quote Currency – GBP/USD

Currency pairs could be major, minor, or exotic. Let us discuss them below.

1. Major currency pairs

The major currency pairs quote the USD alongside another major currency.

They usually have the USD on one side of the quote either as a base or quote currency. Examples in order of popularity are:

  1. EUR/USD
  2. USD/JPY
  3. GBP/USD
  4. USD/CHF

2. Minor Currency pairs

These are currency pairs of strong economies that do not contain the USD. Examples are

  1. EUR/GBP
  2. GBP/JPY
  3. GBP/CHF
  4. EUR/CHF
  5. EUR/JPY
  6. CHF/JPY

3. Exotic Currency pairs

These are currency pairs involving a major currency and a currency of a smaller economy. These smaller economies are often referred to as emerging economies. Examples are

  1. USD/SEK- USD/Swedish Krona
  2. USD/DKK- USD/Danish krone
  3. USD/ZAR- USD/South African Rand
  4. USD/KES- USD/Kenyan Shilling
  5. USD/NGN- USD/Nigerian Naira

Reading a Forex Quote

Forex currencies are traded in pairs written as Base Currency/Quote Currency i.e. GBP/USD. The base currency is usually on the left while the quote currency will be on the right. Here is an illustration below

GBP/USD Quotes

When you go long (buy) on a currency pair, the base currency is being bought while the quote currency is being used to pay for the base currency. It is the other way round when you go short (sell) on a currency pair.

Currencies are always traded in pairs at an exchange rate. The exchange rate is how much of the quote currency is required to buy the base currency.

Assume the GBP/USD exchange rate = 1.2

This means that it will take $1.2 to buy one GBP and vice versa.

While trading forex, we use one currency to buy another hence we can also quote the currencies in terms of BID/ASK prices

The Bid price is the highest price a forex trader is willing to pay to buy the base currency from the broker.
The Ask price is the lowest price the forex broker is willing to sell the currency.

Forex Bid and Ask

Forex Trading Terminology

Certain terms are widely used in forex trading and understanding is very important. We shall discuss some common terms below.

1) Spread

Spread is the difference between the bid price and the ask price of a currency pair.

Spread in Forex

As seen in the image above the GBP/USD currency pair with a Bid/Ask price of 1.3089/1.3091 has a spread of 1.3089-1.3091 = 0.0002

Your forex broker may not always charge you a commission but makes their profit from the spread.

A spread of 0.0002 means if you are trading in a standard lot of 100,000 units of GBP/USD currency, the forex broker makes $20 on every standard lot traded i.e. 0.0002 x 100,000

There are two types of spreads in forex:

Variable spreads: As the name implies, variable spreads are spreads that fluctuate. This fluctuation is due to changes in the condition of the market like high or low volatility. This type of spread is usually offered by NDD brokers as they try to get the best market price for your trades.

Fixed Spreads:These are spreads that remain the same regardless of market conditions. They are usually offered by market makers. Market makers determine the price of the currency pairs they offer. So they can keep the bid and ask price stable no matter the market condition.

2) Pips

Percentage in point alias “pips” is the unit of measurement for the spread.

As seen in the example above, if the spread is 0.0002 it is conventionally expressed as 2 pips. This is for a currency up to the fourth decimal.

3) Lots

Forex currency pairs are traded in lots at forex brokers.

Since the currencies don’t move by a lot, the traders tend to trade a higher number of units. Remember, the higher the traded volume, the larger the profit & loss.

Currency pairs are divided into various lots as seen in the table below.

Lot Number of units of currency
Standard 100,000
Mini 10,000
Micro 1,000

Standard lot example:

For a GBP/USD currency pair with details below-

Exchange rate = $1.36

Standard lot = 100,000 units

The margin needed for trading 1 standard lot will be $136,000 (i.e., $1.36 x 100,000)

Mini lot example:

For a GBP/USD currency pair with details below-

Exchange rate = $1.36

Mini lot = 10,000 units

The balance required for trading a Mini lot will be $13,600 (i.e. $1.36 x 10,000)

So, the margin that you need to trade depends on the total lots or units that you are trading. If you are trading 2.5 Mini Lots, this means that you are trading 25,000 units of a currency.

4) Leverage

Leverage in forex trading is essentially taking a loan from your forex broker to trade most lots. The loan is repaid after you sell and make a profit or a loss.

Leverage in Forex

Most retail forex traders don’t have the required capital to buy or sell thousands of units of currency pair, so they leverage their position. But this is very risky and can result in huge losses.

Leverage of 30:1 means for every $1 a forex trader can trade up to a $30 position using margin money.

Leverage is inversely proportional to margin.

Example:

If margin is 3.33%, then leverage is 1/3.33 = 30 (also expressed as 1:30)

Since leveraging means taking a loan, it is a double-edged sword.

For example, if you lose big on a trade, and if the forex broker does not have Negative balance protection in place, the trader may have to repay more than the initial capital if the losses exceed capital.

The leverage that brokers can offer to retail traders in South Africa for CFDs & forex is as high as 1:1000 (depending on the instrument). This leverage is high and we advise you to choose much lower leverage to reduce the risk of huge losses.

5) Margin

This is a good faith deposit a trader must keep in his trading account. It is expressed as a percentage and is inversely proportional to leverage.

Margin % = 1/Leverage

For leverage of 30:1, the margin is 1/30 = 3.33%

Example:

If a forex trader uses leverage to place a buy order of 1 standard lot of GBP/USD currency pair

GBP/USD Exchange rate = $1.33

Margin = 3%

Required deposit without margin = $133,000 (i.e. 100,000 units x $1.33)

Required deposit with 3.33% margin= $4428.9 (i.e. 3.33% of $133,000)

After the forex trader deposits $4,428.9 in his or her account, then the 1 standard lot trade on GBP/USD can be placed.

6) Negative Balance protection

This is a system put in place by forex brokers to ensure your account doesn’t go into negative when the market moves against you quickly.

Once you lose the deposits in your CFD trading account, the brokerage system automatically closes all your positions.

It limits your loss to just your capital and ensures that the forex broker does not take the risk of your position. Negative balance protection is offered to only retail traders and not institutional traders.

7) CFDs

CFDs are derivatives, and these are contracts between the broker & trader. Derivatives are complex financial instruments that derive their value from other underlying asset such as Stock, Currency, Commodities like Gold, precious metals, etc.

When trading CFDs, a trader does not own the underlying asset and is only speculating on the price of the instrument.

8) Hedging

This is the act of managing risk.

Traders sometimes trade derivative instruments such as currency futures and currency options to hedge against currency and interest rate fluctuation risk.

9) Day Trader

This is a trader who opens and closes trading positions on the same day.

Day traders are usually speculators and use derivative products like CFDs to try to profit from the rise or fall of the price of an asset.

How to Open Forex Trading Account

To open a forex trading account, you need to first choose a reputed broker that is regulated by the FSCA. There are many brokers that are regulated, so you should compare factors like the safety of funds, fees, platforms, instruments, support, ease of withdrawals, etc.

Once you have decided on the forex broker that you want to choose, then you should proceed with opening your trading account. We will take Pepperstone as an example. The steps involved are generally the same at all forex brokers.

Step 1) Compare the Forex Brokers: This step is basically checking the regulation, fees, spreads, instruments, and other factors in a broker.

After you have done your research on the broker that you want to trade with then proceed to the next step.
Important note: Only choose forex & CFD brokers that are regulated by the FSCA. Trading with unregulated brokers would mean that you could lose all your deposited funds.

Step 2) Open your Trading Account: Go to the website of the broker that you want to signup with. Note: go to the website that is listed on the FSCA, and avoid any clones.

On broker’s website, go to the “Open Account” section, and complete the signup process.

Signup with Forex broker

Step 3) Submit your documents for KYC: All regulated brokers are required to complete the KYC of trading clients.
You will be required to submit details like your ID proof & Address Proof. The brokers generally verify it in 48 hours I.e. 2 working days.

Complete the KYC with Forex Broker

Step 4) Download the Platform: All brokers offer platforms like MetaTrader or their own proprietary platforms. Most forex brokers offer multiple platforms.

You will generally get an email from the broker regarding the details on how to download and log in to your platform.

Step 5) Deposit Funds: You can choose methods like a card or bank transfer for depositing. Watch out for brokers that charge extra fees during deposits.

Also, avoid any brokers that charge excessive withdrawal fees. Some brokers claim to charge low trading fees, while charging excessive charges on withdrawals & deposits, making their overall fees very high.

Example of deposit at HotForex Forex Broker

What are Forex Trading Platforms?

Forex brokers act as intermediaries between traders and the market. When you open a trading account, you will need a platform to analyze CFDs, place and monitor your trades. These platforms are offered by CFD brokers and they are divided into two categories. They are ‘third-party’ and ‘proprietary’ platforms. A forex broker can have both or one of the categories.

Third-party platforms are trading apps or software developed by another company. Forex brokers partner with these companies to develop these platforms for them. A common example of these is MetaTrader 4, MetaTrader 5, and cTrader. These three are the most popular trading platforms. They are available on mobile phones, desktops, and web-based trading platforms. You can download them from your broker’s website. The mobile versions are available on Google Play Store and App Store.

In addition, there are third-party platforms that allow forex brokers to link their client’s accounts to their own platforms. TradingView is a typical and common example of this kind of platform.

Proprietary platforms are the opposite of third party platforms.They are owned and developed by individual forex brokers. Some forex brokers prefer to develop their own apps and software for traders. They can be available on mobile, desktop, or on the web. eToro, for example, does not have any third-party platforms. They only offer their CFD trading platform and Copytrader.

Risks Involved in Forex Trading

The forex market is very liquid and this liquidity has caused a lot of traders to throw caution to the wind and even become greedy.

Most retail traders trade forex because of leverage, and this can cause losses to escalate very quickly.
Let us discuss some risks.

1) Risk of Unlicensed Forex Brokers

There are lots of unlicensed brokers who lure unsuspecting traders with promises of huge returns with low investments.

Some of them claim to hold licenses from regulators in countries that are not known for strong regulatory supervision.

Forex traders in South Africa must only trade via FSCA licensed forex brokers. Traders should go to the FSCA website and check if their broker is on the list of licensed forex brokers.

Each forex broker in South Africa is issued a unique FSP number which would aid your verification of the broker’s authenticity. In the screenshot below a forex broker called HotForex has an FSP number 46632 which is used to search on the FSCA website to produce one match.

While at it they should check the phone number on the FSCA website related to the forex broker and call the number to be sure they are dealing with a legitimate broker.

2) Risk of Cloned Forex Brokers

Some scam forex brokers go ahead and clone other licensed brokers.

They go as far as hosting websites with logos and registration numbers to deceive unsuspecting targets. Forex traders must be watchful and look out for red flags such as little differences in the broker name. Forex traders should also report any cloned page they come across to the FSCA.

Scam brokers do exist so you should be wary of them and report anyone you come across to the FSCA.

The first two risks that we discussed are associated with the risk due to a third party i.e. your broker. We will now talk about the risks that you face with actual trading.

3) Leverage risk

Forex brokers in South Africa can offer leverage as high as 1:1000 to their clients

This being said, forex traders should resist the urge to open an account with brokers outside South Africa who offer higher leverage.

Reports state that even with the leverage restrictions, 70 to 80% of retail forex traders lose money. The actual percentage depends on the broker to broker.

This is mainly because of over-leveraging a position. Traders must avoid using more than 1:10 leverage on any forex trade.

Let’s take an example, let’s say you place a buy order on EUR/USD at 1.1000 targeting 1.1100, which is 100 pips. You have $10,000 in your trading account & you decide to use 1:10 leverage to place 1 Standard lot trade.

If the price does go in your direction, then you can make a profit of $1000 on this trade. But if the price goes against you by let’s say 100 pips, then you would lose $1000, which is 10% of your capital. If you had used 1:30 leverage, then the losses would have been $3000, which is 30% of your capital on a single trade.

Hence, you must remember that trading with excessive leverage can cause big losses.

The use of leverage should be done responsibly as it amplifies both gains and losses. You should find out if your broker offers negative balance protection so as to stop your account from going into negative.

You can also use Stop Loss orders to automatically exit a position if the loss exceeds a certain level. Stop-loss orders are automated instructions a trader gives the broker to exit his trading position once the price goes below a predetermined amount. Stop-loss orders could be used to manage risk.

4) Risk of Losses from your trades

The forex market is very volatile and should be approached with caution. For example, it is not uncommon for some currency pairs to move 4-5% in a day.

Normally, even majors like EUR/USD can move 1-2% in a single day. If you are risking too much on a single trade, then you can lose very quickly.

In fact, most of the retail traders trading in the forex market lose their money. It is really hard to be profitable with forex trading, mostly because traders trade with gamblers’ nature of risking excessively.

It is really important to practice risk management on a demo account for some months before going live. Also do not risk more than 2% of your trading capital on one trade.

FAQs on Forex Trading in South Africa

Is forex trading Legal in South Africa?

Yes, Forex trading in South Africa is legal for retail traders & it is regulated by the FSCA. For ensuring that your funds are safe with the broker, you must only trade via regulated brokers.

Is Forex Trading Profitable?

There are many risks involved with forex trading for retail traders, and most of the retail traders lose their money. As reported by major regulators, as high as 85% of traders lose at retail CFD brokers. So you must understand that there is no certainty of profits.

Do forex traders pay taxes in South Africa?

Yes, South African traders are required to pay income tax on profits generated from forex trading. This rule applies to offshore forex trading accounts too.

How much do I need to get started with Forex Trading?

The amount of capital that you put totally depends on your risk level. Most brokers allow low deposits. For example, HotForex has a minimum deposit of R70. Depending on how much risk you want to take, you can decide the amount. But it is really important to never trade with capital that you cannot afford to lose as the probability of losses for retail traders are very high. Have a strategy to manage your risks.

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