What is Forex Trading?

What is Forex trading with green and red candlesticks on chart

This is your quick guide to Forex trading in South Africa, answering the big question on every new trader’s mind: What is Forex trading?

What is Forex trading? Forex trading is the buying and selling of global currencies within the USD 5 trillion a day Forex market. If you think that sounds like a lot, you’d be correct – The Forex market is the largest and most liquid market in the world! If you were to combine all of the world’s stock markets into 1, the daily volume wouldn’t even come close to the volume in the currency markets.

This is achieved because unlike stock markets that require all trades to be executed through the one central exchange like the NYSE; the Forex market is globally decentralised. Regulated by the Financial Services Conduct Authority (FSCA), Forex trading in South Africa is highly popular.

Forex Currency Pairs

When you’re trading Forex, you must always trade currencies in pairs. Some examples of the most popular currency pairs are EUR/USD, GBP/USD and USD/JPY. By trading Forex markets in pairs, you’re buying one currency, while selling another at the same time. Not sure how to calculate the value of a Pip in Forex? Forex currency pairs can be grouped into three main types:

  • Major Currency Pairs: Any Forex currency pair that features the USD, is considered one of the majors. These markets are the most popular and therefore most liquid Forex currency pairs of the 3.
  • Minor Currency Pairs: Any Forex currency pair that doesn’t feature the USD, is considered one of the minors. These markets are less predictable and sometimes referred to as currency crosses.
  • Exotic Currency Pairs Any Forex currency pair that features a currency from an emerging market economy. As South African Forex traders, it’s worth noting that any currency pair featuring the ZAR would be considered an exotic.

Forex Market Analysis

Let’s now take a look at how Forex traders analyse the market. The three types of market analysis within Forex trading, are: Technical analysis, fundamental analysis and sentiment analysis. Many South African Forex traders prefer to focus on learning technical analysis over the others, but the best traders are those who can combine the 3. Take a more in-depth look at the three types of Forex market analysis below:

  • Technical Analysis: Market analysis involving price movements shown as patterns on your charts. The theory behind technical analysis is that humans are creatures of habit, and past price levels can predict where trading is likely to take place in the future.
  • Fundamental Analysis: Market analysis involving the current economic conditions of the economies behind the currency pairs involved. Long term traders use this form of analysis to help determine their expected market direction.
  • Sentiment Analysis: Market analysis involving the overall positioning of other traders within the market. This form of analysis can be seen as a contrarian indicator, used by traders to take trades in the opposite direction to the crowd.

Forex Trading in Both Directions

One of the most significant advantages of trading Forex is that you can make money no matter which direction the market is moving. If you think a currency will go up in value, then you can buy it. As Forex trading consists of currency pairs, you can just as easily sell it and make money from the move lower.

  • Going Long: When buying a market, you’re going long. Long positions move into profit as the price of the market goes up.
  • Going Short: When selling a market, you’re going short. Short positions move into profit as the price of the market goes down.

Live Forex Trading Example

Let’s say that your fundamental analysis indicates the USD is going to continue to rally higher throughout the month. To make money from your analysis, you’re going to need to bring up a Forex currency pair featuring the USD.

USDJPY Major Forex Pair Buy Off 107 Hourly Support

You choose the USD/JPY because your technical analysis backed up your fundamental view that the USD was likely to continue appreciating. If you went long (buy) USD/JPY as price bounced off support (red line) at the bottom of this chart, your trade would have been profitable.

How to Start Forex Trading in South Africa

South Africa is the major regional hub for Forex trading. As a result of unique local conditions, choosing a South African Forex broker regulated by the Financial Services Conduct Authority (FSCA) should be a key consideration for those of you wanting to start Forex trading. Choosing to trade with a regulated South African Forex broker, should be a key consideration when you’re ready to start trading Forex.

Regulated Forex brokers offer new traders the ability to learn to trade Forex on a demo account, only going live when you feel ready. While South Africans can open trading accounts with most offshore Forex brokers, we recommend sticking with an FSCA regulated broker for added peace of mind. Not sure how to start Forex trading?

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Final Thoughts on What is Forex Trading

You’ve taken your first steps toward a goal, but as you’ve no doubt now discovered, the Forex market is one complicated beast. This quick guide to Forex trading in South Africa has only scratched the surface of answering the highly complex, what is Forex trading question. There is a lot more that you’re going to need to learn before you can become a consistently profitable Forex trader, but that’s okay. Rome wasn’t built in a day!

If you’re interested in taking the next step and learning more, make sure you check out our how does Forex trading work page for a more in-depth look into the mechanics of the market.

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