Forex trading, also known as foreign exchange trading, involves buying and selling currencies on a global market. In Africa, forex trading has gained popularity due to the growth of internet access and the emergence of local and international brokerage firms. This simplified guide provides an overview of forex trading in Africa, guiding you through the process and highlighting key considerations.
What is Forex Trading?
Forex is a term that is derived from the term foreign exchange. It is a process where people buy and sell currencies with the goal of making a profit.
The best way to explain what forex trading is to use an example. Assume that you are an American travelling to Kenya. You have $10,000 and the exchange rate between the US dollar and Kenyan shilling is 100. This means that you will have 1 million Kenyan shilling on arrival. You stay in Kenya for a few months. When going back, you meet that the exchange rate has dropped to 90. This means that you will now have $11,111 when you change the funds to dollars.
This is how the forex market works. The idea is to benefit from the fluctuation of currency movements. In the example above, you would have $9090 if the exchange rate rose to 110.
How Forex Trading Works
The forex market is the biggest financial market in the world. This is because data shows that traders exchange currency worth more than $5 trillion. As such, the industry is bigger than the commodities, equities, and ETF market.
Forex trading works similarly as what we have described above. The difference is that the scale is significantly larger. The process is also automated. Generally, there are several key components of forex trading.
First, there is a company that provides a forex trading platform. This company is known as a broker. There are hundreds of companies that provide online brokerage services. These include XTB Crypto, FxPro, and OctaFx among others.
Second, there is a software provider. Most forex trading companies don’t provide their own in-house software. Instead, they use the commonly available software. MetaTrader is the most common trading software.
Third, there is the liquidity provider. This is a company that helps provide liquidity or financing in the trading process. These companies work in the back end to ensure that everything is moving on seamlessly.
Finally, there are regulators. The goal of these regulators is to prevent fraud and to protect the end users.
How to Become a Forex Trader
There are millions of forex day traders around the world. However, the reality is that only a handful of people who start trading making it. This is because forex trading is one of the riskiest things you can do. In this part, we will look at the steps you need to follow to become a successful day trader.
Find a Good Broker
There are hundreds of brokers around the world. Some are good, while others are not all that good. You should take time to find a credible broker, who you will use to trade. Ideally, you should look at a broker that has the following qualities:
- Regulated by a major financial regulator.
- Has been in the industry for several years.
- Offers hundreds of financial assets.
- Has a good web and mobile platform.
- Has a platform that is easy to use.
Sign Up for a Demo Account
Most forex brokers offer a demo account. This is an account that gives you access to the financial market. It gives you virtual money that you can trade with. The demo account is an important tool because it helps you see how the market works. Here are a few tips of using a forex demo account:
- Start with the same amount you intend to trade with.
- Take the demo account seriously.
- Experiment with various indicators and strategies
- Take a few months on demo before you move to live trading.
Learn More About Trading
After downloading the demo software, you should take time to learn more about trading. We recommend that you use some books on trading. Reading will give you an exposure of the market. It will also help you understand more about the market. Fortunately, you can buy these books on Amazon. Here are some trading books that we recommend when you are starting:
- Trading for a living by Alexander Elder.
- Day Trading and Swing Trading by Kathy Lien.
- Come Into My Trading Room by Alexander Elder
- How to Trade for a Living by Andrew Aziz
Come Up With a Strategy
You should come up with an ideal trading strategy. Fortunately, there are many forex trading strategies that you can use. Some of these are:
- Scalping. This is a process of opening and closing trades within a few minutes.
- Swing trading. This is when you open trades and wait for a few days.
- Arbitrage. This is a process where you open multiple trades simultaneously. You will make a profit from the spread between the profit and loss.
- Algorithmic trading. This is where you use algorithms to automate your trading.
- Fundamental trading. This is where you base your trading on the prevailing economic environment.
- Technical trading. This is where you trade based on the technical indicators.
Finally, after spending time on the demo account, you should now start trading. There are several things you should consider here.
- Deposit money you can afford to lose.
- Follow the strategy you developed before.
- Download the accompanying mobile application.
- Use proper risk management strategies.
- Realize that you can lose money.
- Wait before you start trading full-time.
Benefits of Forex Trading for a Living
As mentioned above, millions of people are trading for a living. There are several benefits that come with being a day trader. These benefits are:
- Use of leverage. With forex, you can trade using more money than you have using leverage.
- 24 hours. Unlike other assets, you can trade in forex for 24 hours, 5 days a week.
- Minimal starting capital. Many forex brokers accept traders with as little as $250.
- No capital expenses. All you need to trade is a computer or a smartphone and internet connection.
- Minimal work. In forex, you don’t do a lot of work like in other industries. All you need to do is to analyse currencies and trade.
- Easy to automate. You can use various algorithms to automate your trading.
Disadvantages of Forex Trading for a Living
I recently read an article that talked about how difficult it is to make money as a day trader. As an experienced trader, I believe that the writer was right. It is incredibly difficult to be a full-time trader. Also, a lot of traders experience a lot of stress, and by not knowing the right tricks, it is possible to lose a lot of money. It is therefore not something that can be done by anyone!
Still, it is possible to be a successful trader. To achieve this, you need to first read a lot, practice a lot, and use quality risk management strategies.