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As the effects of lockdowns are felt around the world, there is a growing need for many to earn a supplementary income. In the wake of lost jobs and opportunities, forex trading levels increased hugely in Africa, with some researchers citing a boost of almost 500% in the first five months of the pandemic. But it’s far from a get-rich-quick fix: here be dragons. We asked six forex traders to share their know-how.
It’s not for just anyone
CM Trading, a local broker which was awarded the best financial broker in Africa (2019) by International Business Magazine warns that trading forex is highly speculative, carries a high level of risk and may not be suitable for all investors. “You should be aware of all the risks associated with trading on margin,” they say.
For CM Trading, it all begins with knowing the stock market. So before you begin to delve into forex trading, familiarising yourself with the stock market is crucial. Alongside this, technical analysis is vital to being a successful trader. “In the forex market, traders use technical analysis to measure supply and demand. Technical analysis utilises mathematical formulas that analyse overall changes in prices.”
Traders will use technical analysis to measure where a forex pair is undervalued, overvalued or whether its momentum is building, which could possibly cause a sharp change in prices says CM Trading’s education team.
Know when to fold ’em
For OINVEST brokers, it is important to know when to keep going and when to stop. “In the financial market, ‘stop loss’ and ‘take profit’ are very important risk management tools used by traders to mitigate risks involved in trading securities,” says their team. Because prices of the trading instruments are constantly fluctuating, traders must employ strategies that will curb their losses when the trade goes against them and cash in on profits before the tide turns. “That is exactly where ‘stop loss’ and ‘take profit’ comes to the rescue. They are widely used by investors in the stock market, forex and CFD trading,” says OINVEST.
Knowing when to call it a day is a sentiment shared by Tom Anderson from Standard Bank FX. Traders very often have a loss aversion bias. They tend to stick with losing trades and take profit too early on winning trades. “This is the biggest thing that differentiates professional traders from amateurs,” says Anderson.
Stick to your own
On currency pairs, Plus500 advises traders to stick to their country’s currency. “It is likely that you will be more familiar with political and economic events that take place at home,” says Plus500. It is also likely to be easier to research economic events and trends as they tend to be covered daily by news outlets and talked about on social media.
The trading platform also further advises that each trader should consider their own personal situation and remember that some currency pairs are more liquid than others, which in theory makes them easier to trade.
Is the trend really your friend?
For AvaTrade, identifying trends and how to apply them in your strategy is paramount. The saying “The trend is your friend” might be popular in financial markets, but it can lose its meaning. Thus, AvaTrade advises getting to know the trends. “The easiest way to identify trends is by watching the raw price action of an asset,” they say.
An uptrend is identified when an asset’s price is consistently making higher highs and higher lows, while a downtrend occurs when the price is making lower lows and lower highs. The trend is sideways or horizontal when the price oscillates between fixed levels of support (the bottom-most border) and resistance (the upper).
AvaTrade also says it is important to know what creates and sustains trends.
“In currencies, a currency may enjoy strength or experience weakness depending on the underlying country’s interest rates, employment, trade and other economic factors,” says their team.
Using the news
IQ Option, another multi-award-winning platform based in Cyprus, keeps traders on their platform up to date with market news as they deem it important to know what’s happening on the world’s top financial markets and how the most influential companies choose to react to fluctuations.
As Anderson says, it is important to keep an eye on the news, but it is equally important to use this tool in conjunction with others. “You can’t trade on headlines – and efficient market hypothesis dictates that most ‘news’ is already in the price.” He advises understanding dynamics such as exports and imports, current account movements, growth, and real rates. “I would think you should concentrate on simple technical analysis. This helps give healthy risk and reward and exit levels.”
“Your stop loss level is the most important thing for intraday traders. I can’t stress this enough,” says Anderson.
At the end of the day, if all these technicalities and the risks of trading leave your head spinning, it's good to know that you can call on the experts – such as those at Standard Bank, home to Africa’s biggest trading desk – to take the reins.
*Although the award-winning Shyft app makes it simple to convert rands to foreign currency, and vice versa, the app was designed for buying, sending and storing forex rather than for trading.