The foreign exchange market is where currencies are traded. Have you ever wondered what is Forex trading and how does it work in South Africa? Is it different from other foreign countries who also trade currencies? First, we provide the definition of Forex and explain how it works.
What is Forex Trading?
Forex Trading, also known as foreign exchange trading, is the act of exchanging one currency for another through foreign exchange broker or at a bank such as FNB, ABSA, Stand Bank and Capitec Bank. The trader exchanging his/her money will receive the foreign currency at the exchange rate set by the broker or bank.
The Forex market is very volatile, dynamic and highly liquid market with over $5.3 trillion USD being traded every day. Forex opens 24 hours a day, Monday to Friday, creating endless trading opportunities for traders.
How Does Forex trading work?
Forex trading works just like other financial market such as stock and assets trading. Forex traders purchase or sell currencies at the exchange rate. The main objective of trading is to make money. This decentralized market consists of organisations, banks and individuals who want to make profit from the trade.
What is a currency pair?
Forex is always traded in currency pairs. A currency pair is the quotation of two different countries’ currencies, with the value of one currency unit quoted against the unit of another currency.
The first currency is the base currency, while the second is the quote currency. The exchange rate difference of the currency pairs is a key factor in currency trading. Below is an example of a currency pair:
What affects currency prices?
Currency exchange rates can be affected by many factors. One of the biggest price influences is the supply and demand. The value of dollar increases when the world needs more dollars. Some of the factors affecting the currency prices include geopolitical tensions, interest rates, central bank economic policy and current events just to name a few.
Always make sure that you work with a good trusted broker. Forex brokers in South Africa make sure that they give traders access to the foreign exchange market and a trading platform where they can perform forex trades. Brokers can with big financial institutions or individuals.
Forex Trading leverage
Leverage in Forex is that the magnitude relation of the trader’s funds to the dimensions of the broker’s credit. In different words, leverage may be a borrowed capital to extend the potential returns. The Forex leverage size sometimes exceeds the invested with capital for many times.
The size of leverage isn’t mounted in the least corporations, and it depends on trading conditions provided by a precise Forex broker. So, Forex Leverage may be a method for a trader to trade abundant larger volumes than he would, using solely his own restricted quantity of trading capital.