At a time when South Africa faces the prospect of a credit downgrade, which would spell bad news for both consumers and investors, the foreign exchange (forex) market offers a potential financial lifeline.
Even though the Rand tumbled to a new record low against the US dollar in early 2016, it still outperformed other currencies in emerging markets. So, with online FX trades, South Africans could boost their financial position in spite of tough economic times and possible interest rate hikes.
Having said that, exchanging one currency for another doesn’t always guarantee impressive returns. For this reason, here are 5 things you must know before getting into forex.
- You Don’t Actually ‘Trade’ Anything
Just like other financial markets, you will see and hear a lot of trading terms on the foreign exchange market. However, you don’t actually ‘trade’ anything. Instead, you will ‘bet’ on whether or not one currency will rise or fall against another.
This also means that you don’t actually own the currency you are betting on. In fact, the term ‘exchange’ can be somewhat deceiving, as you aren’t swapping one for another either.
- Currency Performance Is Relative
Just because the Rand has slumped against the US dollar doesn’t mean to say it should be ignored or overlooked altogether. After all, it could be outperforming another currency, which is where gains can come to fruition.
So, you will need to learn about trading currency pairs. For example, you could enter a short position against the ZAR/USD but be long against ZAR/JPY, which means you think the ZAR will lose out to the USD but be higher than the JPY.
- Practice Makes Perfect
Before you dive head first into forex without knowing when to enter and exit a position, it makes sense to practice first. Thankfully, there are numerous demo accounts available for you to practice laying money down on a trade.
Even if you have had previous experience with stock trading, forex is quite different. But by practicing, you can learn how to use the trade platform and how to manage your positions.
- Don’t Disregard Small Profits
There is little to no point thinking you will create instant wealth though foreign exchange, as there are too many factors out of your control. Therefore, don’t disregard the small profits that come your way.
Forex traders that chase more money are prone to making mistakes and will often fall into common currency pitfalls, which could lead to losses rather than gains.
- Have a Strategy And Stick To It
Think carefully about why you want to trade currencies through forex and have an end-goal in mind. By doing so, you can develop a coherent trading strategy, which enables you to ignore your emotions.
As soon as you make a couple of profitable trades, success can go to your head. Therefore, it is crucial that you remain cool, calm, and collected at all times, making competent choices with the smallest margin for failure.