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The foreign exchange markets, also called forex, FX, and currency trading, is where all the currencies of the world are traded. Unlike other markets there is no central location for the forex markets, they are decentralized and trading is conducted electronically all across the globe, 24 hours a day. It is the world’s largest and most liquid market as well, with daily trading volumes of $6.6 billion as of 2019. Even if they were combined, all the other stock and commodity markets in the world wouldn’t come close to the trading volumes seen in the global currency market.
How is this important to you as a trader? The forex markets offer some of the greatest trading opportunity in the world, that’s why it’s important to know about forex and its markets.
The ZAR on The Global Stage
The South African rand (ZAR) is widely considered one of the world’s most volatile currencies. As a BRICS (Brazil, Russia, India, China, South Africa) country, South Africa’s economy presents opportunities and obstacles for investors. The USD/ZAR has been known to whipsaw wildly between extremes. The currency pair has fluctuated between 12:1 and upwards of 20:1 between 2016 and 2021. The FX pair was bearish between 2016 and 2018, as the ZAR generally appreciated relative to the USD. From early 2018 to the present day, the general trend has reversed.
The USD/ZAR pair appreciated sharply, rising from around $1: R12 to $1: R15.3090. South Africa’s currency-related dilemmas stem from a combination of domestic economic policies vis-a-vis financial mismanagement, inefficiencies of government-owned enterprises, and loss of investor confidence. External forces applying pressure on the ZAR include a risk-off approach to emerging market economies by developed nations.
During the 2020 onset of the coronavirus pandemic, global economic enterprise ground to a halt. Government-mandated shutdowns around the world reduced capital flows to emerging market economies, like South Africa. Credit downgrades have impacted South Africa’s ability to raise Foreign Direct Investment (FDI), thereby hampering a strengthening of the ZAR. While 2020 and 2021 are anomalous in terms of global economic enterprise, the trends that presented at the time were indicative of the overall status of the South African economy. As of 2021 March, the inflation rate in South Africa hovered around 4.13% – 6.3%, with stabilisation expected at a rate of 4.5% in the future.
The USD/ZAR currency pair prices in the uncertainty in the financial markets, particularly as it pertains to where international financial flows are moving. When emerging markets become attractive to investors, the South African Rand tends to strengthen relative to the USD.
As foreign currency is used to purchase ZAR for investment purposes, this drives up demand. With the Federal Reserve Bank releasing trillions of dollars in stimulus money into the US economy, concerns about inflation are growing. If inflationary pressures rise beyond the 2% threshold set by the Fed, various forms of tightening may take effect. This could entail interest-rate hikes to soak up excess money. By March 2021, signs of inflation-related concerns began to show in US financial markets as major indices recorded steep selloffs. With a strengthening of the USD, commodities prices such as crude oil, and gold tend to rise as more foreign currency is needed to purchase the equivalent value of dollar-denominated commodities.
As a major commodities producer, South Africa can benefit from a strengthening USD, since this means more ZAR will be earned per unit commodities sold. On the flipside, a strengthening of US bond yields tends to redirect capital flows away from risk-on prospects such as the ZAR, towards the relative safety of US bonds.
Forex in Action in South Africa
Anyone who has travelled outside their own country or region will most likely have made a foreign exchange transaction. If you travel from New York to London you have to exchange your U.S. dollars into pound sterling for use in the U.K. When you exchange those dollars there will be a forex exchange rate applied to the transaction to determine how many pounds you get for your dollars. This exchange rate is constantly changing based on global supply and demand for both dollars and pounds.
Because these exchange interests rates are always changing when you arrive in London you might receive 1.20 pounds for each dollar you exchange. Several days later you exchange more and you receive just 1.19 pounds for each dollar. For your small transaction this difference isn’t much at all. But think of a large international company that needs to exchange millions of dollars into pounds every month. Can you imagine how much the profitability of this company could be impacted by the changing forex rates? Whether you’re an individual traveling overseas for business or pleasure, or a multi-national corporation, it pays to wait until exchange rates are in your favour.
Where are the Opportunities in Forex?
As a trader you’ll be pleased to know that currencies can be traded just like any other asset. There are many benefits to trading currencies, and one is that unlike stocks it is just as easy to trade moves lower as it is to trade moves higher.
If you think the pound will become more valuable you can buy it. If you think it will become less valuable you can just as easily sell it. And because the forex markets turn over $6.6 trillion a day finding a buyer or seller to take the other side of your trade is almost never a problem.
Suppose you read the news today and find out Australia has lowered its interest rates. You learn more about why they are lowering rates and you believe this will continue. Lower interest rates typically lead to lower currency values too, so you decide to sell the Australian dollar to profit as it becomes weaker.
You also need to decide which currency to sell the Australian dollar against. And this is important because a currency may get stronger against one rival currency while getting weaker against another at the same time.
Which Currency Pairs are Most Important in Forex?
Seven currency pairs are known as the major pairs, and these are all pairs that include the U.S. dollar. Beyond those seven are the minor, or cross currency pairs, which do not include the U.S. dollar and are typically less liquid and more volatile when compared with the major pairs. And finally there are the exotic pairs which are the least liquid and most volatile.
Major Currency Pairs
The major currency pairs are the most heavily traded, making up roughly 80% of all forex market trade volume. There are some who believe there are only four major pairs – EUR/USD, GBP/USD, USD/JPY, and USD/CHF. Others claim the total of major pairs is seven as they add the commodity pairs – USD/CAD and AUD/USD.
These pairs are all distinguished by high liquidity and low volatility.
Each of the currencies in these pairs is from one of the G10 nations, making them stable and less likely to be manipulated. They also typically have the smallest spreads.
Minor/Cross Currency Pairs
Minor currency pairs, also known as crosses, are pairs from G10 economies that do not include the U.S. dollar. Just like the major pairs there are seven minor pairs in total. These are: EUR/GBP, EUR/JPY, GBP/JPY, GBP/CAD, CHF/JPY, EUR/AUD, and NZD/JPY.
Minor pairs tend to be less liquid and more volatile when compared with major pairs. They also have larger spreads.
Exotic Currency Pairs
Exotic pairs include one major currency paired with the currency of an emerging market. These pairs are most volatile and least liquid, and also have the largest spreads. Some are susceptible to manipulation, and most are sensitive to sudden changes in political or geopolitical events.
Start Trading Currencies with a Forex Broker
Registering with a forex broker like AvaTrade ZA literally takes just minutes and it opens up a whole new world of trading opportunity.
You’ll appreciate our professional attitude, our adherence to all regulations, and mostly our commitment to our clients.
Simply register, confirm your identity and residence for KYC/AML compliance, open your forex account and make a deposit. That easily you’ll be ready to trade. Go ahead and place your first trade, or you can take advantage of our demo account that allows you to trade with virtual cash to test out your ideas without any risk.
And whenever you’re ready to start trading with real cash we’ll be here to help you with your forex trades.
Learn Forex Trading
As a global forex broker with years of experience we know how important it is to continually increase your knowledge and understanding of the forex markets. That’s why you’ll find such a variety of educational tools here at AvaTrade South Africa. We want to make sure you have every chance at success.
Our educational tools include a number of articles and eBooks, as well as videos and much more.
We also have social trading platforms you can take advantage of, which will not only provide you with potentially successful trades, but will also teach you more about how to look for your own profitable trades.
We also have many useful tools to help you plan your trades. These include our earnings releases, trading and economic calculators, and our market analysis.
Trading Platforms in ZA
Another tool we provide is the forex trading platform. This is where you access the trading into the forex market, as well as analysing the price action of the currency pairs you’re interested in trading. A good trading platform can mean the difference between a successful trader and a struggling trader.
As one of the top global brokers AvaTrade ZA is pleased to provide its south african clients with the best services, tools, and platforms available. That’s why we have the world-class MetaTrader 4 and MetaTrader 5 platforms available for download to PC and Mac, as well as the Web-based version and the mobile app for Android and iOS.
The MetaTrader 4 Platform
The MetaTrader 4 (MT4) platform was developed in 2002 and has since become one of the favourite trading platforms thanks to its powerful features and the access it gives traders to forex, commodities, and other financial instruments.
MT4 is extremely powerful because not only does it give our traders the ability to access the forex markets, it also has all the tools necessary for managing trades and analysing the markets. Plus, MT4 is free to download and use.
You’ll be able to take your trading to the next level with the charts and tools available to analyse markets in real-time with the more than 30 technical indicators built into the MT4 trading platform. Identify market trends and identify entry and exit points for your trades more easily.
The MetaTrader 5 Platform
MetaTrader 5 (MT5) is the updated and most advanced MetaTrader platform available, and AvaTrade South African clients are able to download and use it for free. It is built with an emphasis on providing traders with even greater access to financial markets. With it you can successfully trade commodities, stocks, indices, futures, and CFDs in addition to forex..
It includes all the same powerful tools and indicators as MT4 and expands on them with automated trading and copy trading capabilities.
MT5 also comes with an alert system so you won’t miss any potential trades. And there’s a built-in MQL5 community chat that you can use to share and discuss trading ideas with other traders. Or take advantage of the signals provided by the MQL5 community and put your trading on auto-pilot.
When you combine all the resources, tools, and education available to trader’s who choose AvaTrade you’ll see why it’s a smart decision made by many successful traders.
If you want to trade forex markets with a global forex broker sign up to trade with AvaTrade ZA today and take a look to our Forex Trading Tips.
Forex Trading FAQ
- Can you get rich by trading forex?
Most traders start their forex career with hopes for getting rich, but is that truly possible? As with any type of investing there are risks of course, and the best way to get rich is to start with a large amount of capital. Forex trading can be a real struggle, and data shows that more than two-thirds of forex traders don’t make money in any given year. Yet of the one-third that do make money some are indeed getting rich. If that’s your hope too then be sure to safeguard your account by using stop-losses, limiting your leverage, and use a reputable forex broker like AvaTrade.
- How do you start trading forex with $100?
AvaTrade offers a forex mini-account where you can start your trading journey with as little as $100. It’s an excellent way to become familiar with the markets, and to begin learning about your own trading style. You may not get rich, but you will get some valuable trading experience in live market conditions, and that can’t be replaced, even by demo trading. In addition to that you should begin to develop some profitable strategies for trading the forex markets. If you have limited funds starting out this way can be your entryway to some of the most exciting markets available.
- How difficult is forex trading?
Forex trading can be extremely difficult when you’re just getting started, but as time goes by and you gain more experience it becomes easier. The early difficulties are simply the learning curve as you come to understand the jargon, how to use the trading platforms, begin studying technical and fundamental analysis, and everything else that goes along with trading forex. As time goes by many of these things become second nature, and at this point forex trading becomes much less difficult. It might never become easy, but nothing worth having is ever easy, is it?