With a growing interest in forex trading in South Africa, we've compiled seven things you should consider before you invest.
1. Forex trading is very high risk
You can lose money as fast as you make it. That's because no one can predict with any certainty how currencies will perform. Bond and currency specialist Elaine Mabiletsa told City Press: "What investors don't realise is that forex trading is very high risk and for every winner there is a loser. Not even a bank with all the access to information and research consistently makes money out of trading currency." The Moneyweb's Alec Hogg adds: "Major financial institutions often lose big money in forex trading. And that's in spite of hiring talented professional traders... Add to that the fact that these traders are focusing on market moves second-by-second and often have years of hands-on experience in trading forex and it comes rather obvious how high the odds are stacked against you."
"Foreign currency is one of the toughest markets to trade and I have seen grown men who are professional traders for the banks, emotionally break down when trades have not gone their way," a senior Standard Bank forex trader once told journalists. Real Trader's Chrizette Rossouw says what makes trading very personal is that it involves real money, which can be gone in one fell swoop. After losing many trades in a row and countless times thereafter, accepting that not all your trades can be winners is not easy, according to Jaba Investments. Beginner traders then need to assess if they are well-suited to the high stress of forex trading.
3. You might never become a millionaire
Jaba Investments cites statistics indicating that beginner traders lose about 90% of their capital within 90 days of trading. Rossouw, a trainer herself says only 5% of traders are successful but people aren't being told this. That's why not every trader is a millionaire. She says there's a discipline in becoming good at the skill because Forex trading is a specialised form of trading, that can't be learnt in one day. Rossouw advises that patience and trading experience will stand you in good stead of being successful. Learning about risk management can also help. "Without enough training, you could enter a trade or a series of trades, make a number of trading errors and lose big." she says.
4. There are no guarantees
Johannesburg-based forex trader Tshepo Brand tells HuffPost SA: "There are no guarantees, and any forex trader who tells you that is a liar." No one and no system has yet been developed which can accurately predict how the market will perform. Mabiletsa adds: "For someone to pretend they have developed a system that consistently produces profit is impossible. If they had, they wouldn't be trying to sell courses and software to people, they would be too busy making billions."
5. There's lots of scammers out there
A growing number of people have reported being scammed by forex trading companies, who later disappear with their investments. And this is the biggest concern raised by the majority of forex traders HuffPost SA spoke to.
They advise potential investors to ask these questions before they part with their money: How much trading experience does the company or person have? Are they registered with the Financial Services Board? Where are their offices? If it's a trainer, how much do they charge for the training sessions and is this market related? Who are their success stories? Do they offer mentorship and support? Are the returns promised realistic?
Further, potential investors are advised to make sure the money they invest with a trader or a trading company is stored under their personal name in a separate trust account, and not under the name of the trader. So that should the trader go out of business, they don't lose your money.
6. There are some regulatory issues to consider
A number of forex trading companies do not have a local geographic presence. This means a particular trading company cannot necessarily be held to account under South African law, or it may be tough to do so should they transgress in any way with your money. In contrast, trading companies with a physical presence in South Africa are regulated by the Financial Services Board, if they are registered. So if you are a trader and looking to use an overseas broker, go for one that is regulated in a strict financial jurisdiction like the U.S. or the UK. "The brokers operating in these countries are structured in ways that make 'running away with your money' or carrying out fraudulent practices very, very difficult," advises Forex System Profits.
7. Start with a demo account
Some forex traders advise beginner traders to not open a live trading account until they have received good training and or are comfortable to do so. They say starting with a demo account before trading with real money is better. So as a potential trader, you have this option. However, Rossouw cautions that demos aren't real money. "Demos are easy because it's not real money. You need practice with real money and you need to experience what the market does to you," she concludes.