The daily turnover of forex trading in South Africa was thought to be in the region of $19.1 billion back in 2017, but there’s no doubt that higher rates of Internet penetration and the impact of the coronavirus pandemic has accelerated activity across the board.
At the same time, the South African Rand (ZAR) remains one of the top 20 most traded currencies in the world, while this asset alone drives trading volumes of almost $70 billion in the current marketplace.
However, the forex market is volatile and unpredictable, so newcomers to the space will have to build knowledge and insight before trading. In this article, we’ve built a comprehensive guide to help you get started:
Getting Started – What is Forex Trading?
In simple terms, the $1.934 quadrillion FX market involves the buying and selling of global currencies, which are traded in major, minor and exotic pairs according to a free-floating exchange rate that’s impacted by multiple macroeconomic and geopolitical factors.
Forex is also a speculative market, which enables you to trade the price movements that affect specific currency pairs without assuming ownership of the underlying financial instrument.
This makes it possible to profit regardless of the prevailing economic climate, while it also enables you to realise short-term profits and leverage the market’s innate volatility to your advantage.
When you buy a particular currency in a pair (the base currency), you believe that it’s going to appreciate in value against the second currency (the quote currency). This is known as going long, while going short involves selling the base currency in anticipation of its value declining.
What Factors Impact Forex Trading?
As we’ve already touched on, there are numerous factors that impact the forex market and the real-time value of currencies. We’ve outlined some of these in more detail below:
#1. Macroeconomics
Macroeconomic factors describe multiple elements that form the aggregate of the wider economy, and many of these impact directly on the global forex market.
Two of the best examples are inflation and interest rates, which enjoy an inverse relationship and have been in the news prolifically of late.
In November 2022, the inflation rate in South Africa peaked at 5.40%, and while this is markedly lower than most of the developed and developing world, it’s still considerably higher than most household budgets can spare. This has encouraged multiple central bank base rate hikes, in order to curb spending, incentivise savings and potentially inflation growth.
When inflation is high, the purchasing power of the afflicted currency diminishes markedly. At the same time, low interest rates also reduce the value of currency, by capping demand and minimising capital inflows from overseas.
#2. Geopolitical Tensions
This is another key and prevalent factor, and one that has been borne out during numerous financial crises’ and periods of forex volatility.
During the US and China trade war under the Donald Trump administration, for example, trade flows between the two countries fluctuated considerably, causing both currencies to depreciate over time (and particularly the US dollar).
During times of financial crisis, geopolitical conflicts and crises tend to either be triggered or exacerbated, and these issues can often combine to drive currency values down further.
#3. Supply and Demand
If we explore this further, we see that both of the factors above can impact on real-time supply and demand in the forex market, which impacts valuations and even the liquidity associated with specific currency pairs.
As we’ve touched on, for example, lower base rates of interest make a currency less valuable to foreign investors, with this decrease in demand causing values to fall incrementally.
Conversely, rampant or sustained inflation erodes the purchasing power of individual currencies, causing some to depreciate in value against others (most major currencies have fallen against the dollar through 2022, for example).
The Last Word – Understanding Leverage and Managing Risk
From a new trader’s perspective, one of the most difficult things to cope with is the management of risk, particularly when you consider the leveraged nature of the market and how you’re able to open and control positions that are disproportionately large when compared to deposit.
However, the relationship between leverage and margin is a difficult one, and while some reputable brokers enable you to open positions that are 200x larger than your deposit, this incurs the risk of sizable losses as well as impressive gains.
So, leverage can work against you depending on the movements of the market and factors that we discussed above, and you can take a detailed look at this forex trading quiz to help learn more about the concept.
As a general rule, however, we’d recommend managing your expectations and using leverage conservative as a new trader, based in line with your knowledge, experience and desire to scale your efforts incrementally over time.
Similarly, you should make the most of automated risk management tools like stop losses, which automatically close open positions once they’ve incurred a predetermined level of loss that you set yourself!