Forex trading is often looked at by individual retail investors as a field where you can multiply your investment in a matter of days. The prevalence of the smartphones has led to an exponential increase in number of active retail traders on the market. Market studies reveal that nearly 70% of the active traders have started trading only in the last couple of years.
It’s business strategy of many brokers to lure customers with lucrative offers but in practice, it’s almost never as easy as it seems. Most of the first-time traders have no trading experience whatsoever, this only makes it easier for brokers to sell their products with exciting offers.
The concept of high leverage and lure of high potential returns have tricked traders to believe that the Forex market is easy to deal with.
But it is a well reported fact that out of the millions of forex traders that trade, over 70% of them lose. This goes to show the harsh reality behind Forex, CFDs & online trading.
As an individual it is understandable that you are always on the lookout for better income opportunities and if you are considering Forex trading then you must consider a few factors in your decision-making process.
- Regulatory Compliance
The first and foremost that a trader needs to do before he/she can begin trading is to open a trading account. Since there are countless brokers out there offering similar services on their platforms, it’s not at all easy to figure out which one is the right one for you.
Each country has its own Financial markets regulator who is the governing authority over retail Forex policies, rules, framework and regulations in that country. FSCA in South Africa, ASIC in Australia, FCA in the UK & ESMA are some of the most well-known regulators around the world.
It’s not easy to get license from these regulators as they have a several qualifications & financial requirements that need to be fulfilled by the brokers before they are granted a license. This is the reason why are there only a handful of licensed brokers as the qualifications are hard to meet.
Any broker who does not have a license is forbidden to offer trade services legally, if a regulator finds out that a trader is trading with unlicensed broker then the trader as well as the broker could be penalised.
All the forex brokers operating in South Africa need to obtain license from FSCA for offering Derivative instruments under their ODP licensing scheme. Any forex broker that is not regulated & is offering CFD trading products in SA is doing so illegally.
Regulations require brokers to publish their license details on their official website and regulators like FSCA also publish the list of licensed brokers in the country. This helps traders choose licensed brokers.
Trading with a regulated broker ensure fair dealing for the traders, and grievance redressal in case there is a dispute with the broker or claim of malpractice against it.
- Account Opening Process
It has been made mandatory by every regulator that traders who sign up at regulated broker will have to provide a set of documents to prove their identity, financial adequacy & literacy, before they can start trading.
This is to ensure that no fraudulent practices take place & only professional traders who understand the risks of the financial instruments they are trading are allowed to participate in the market.
The broker will require details such as your name, address, birth date, ID proof, Address proof etc. The broker will also ask why you want to trade, what’s your income source and may ask for bank statement for verification of your financial background.
It’s standard industry procedure and this needs to be done to open a trading account. Ensure that you give all the correct details and cross check before submission. There are numerous instances where there were problems with withdrawal as there was some mistake in submitted details.
- Cost of Trades
Every time you open & close a trade with a broker, there are certain charges and fees you will need to pay. These charges are very important since they can take away a huge chunk of your investment capital, so it should be carefully taken into account.
Different brokers have different fees applicable, like for example some charges are withdrawal fees, conversion fees, trading fees, transaction fees.
Some broker charge commission on a trade which means that the more you trade, the more you have to pay commission. Commission has to be paid regardless of the fact whether you make money or not.
You should the broker that you feel is offering the best service on the market keeping in mind the charges.
Most well-established brokers have uniform charges and fees to their customers.
Also, you should consider whether the broker offers multiple account currency options or not. You should consider a ZAR Account broker if you are depositing in ZAR (Rand), as this will save you the extra cost of exchange rates fluctuation if your account was in USD or EUR for example.
- CFD trading is risky & you can lose your entire capital
CFD’s are considered a high-risk instrument. When you are trading CFD, you don’t own the underlying instrument, but instead you are only predicting the rise & fall of the price of that instrument & placing a buy or sell order according to your prediction.
Traders can lose their total investment or more if they are not aware about the leverage limits offered by brokers. Market volatility & high leverage are the leading reasons why traders lose their money when trading CFDs.
During 2020, ASIC in Australia estimated that millions of dollars were lost by CFD traders, and they pointed high leverage limits as the leading cause. It’s because of the high-risk nature of using borrowed money that regulators around the globe have brought leverage limits to 1:30. This is the reason why you can see brokers trying to register client under offshore regulators to offer more than 1:30 leverage limits.
Currently, most FSCA regulated forex brokers offer high leverage compared to European, UK & Australian regulated brokers. So, traders must self-restrict themselves & not use more than safe leverage limits of 1:10.
If a broker is offering extremely high leverage limits than that then you can be certain that they are unlicensed. Before you start trading, understand leverage, it’s risks & how it will impact your trades.
- Device of Choice
Almost all brokers offer their services on mobile platforms nowadays. Some brokers have their own platforms whereas some brokers use common platforms like MetaTrader.
As a trader you need to download these platforms onto your mobile and choose a platform that is easy for you to operate. Most of the platforms mainly depend on the experience level of the customers. Traders who have done other trading before will find it easier to use Forex broker’s platform since the functions are similar.
Experienced professionals prefer to use web or desktop trading services as there is more information available to make informed trade, use algorithms & manage orders.
- Available Instruments
Before you choose a broker and open a trading account, you will need to choose what instrument do you want to trade
Not all brokers offer all instruments, you need to ensure that the broker you choose offers all instruments. Otherwise, you will have to shift to a broker in the future if they don’t offer a certain instrument.
There are several instruments such as stocks, currency pairs, indices, cryptocurrencies etc.
- Types of Forex Brokers
There are two types, one is a NDD broker and one is market maker. The NDD broker connects a buyer and seller whereas a market maker creates a market for investors to buy and sell & may take the opposite side of your trade.
You must avoid a broker that has conflict of interest with you like in case of a market maker. Brokers these days offer hybrid models, which is a mix of types & they match the participants depending on the liquidity & order flow.
As a trader you must know whether your broker is a market maker or ECN, as their services and fees charged will be different, and also there could be conflict of interest.
- Risk Management
The financial markets are extremely volatile and you cannot be certain how it will react at any moment. As a trader you want as much help as possible in helping you make the right prediction and help save you from losses in case you are wrong.
There are features as stop-loss management, negative balance protection etc. that are there to help traders carry out their trades & limit losses. These features are vital as the can help you determine how much profit you want and how much loss you can undertake. In the long run it will help you make calculated trades.
Regulators too expect brokers to offer such services to traders to ensure the interests of the traders are protected at all costs.
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