Why forex trading in Africa exploded by 477% in the last 4 months – Op Ed
Louis Shoeman, Managing Director of SA Shares looks closely at factors that influenced the Forex in the last 4 months
By Louis Shoeman, Managing Director, SA Shares
One of the main factors, that has inadvertently led to several others, which has greatly affected the Forex Market is the emergence and the spread of Covid-19 on a global scale.
Due to the virus causing a global pandemic and forcing several sectors and thousands of companies within these sectors to temporarily shut down operations in an effort to curb the spread of the virus, the scales balancing the Forex Market had been tipped.
A significant amount of companies saw the loss of revenues and shares, countries have seen economies hanging on by a thread and economic situations have caused havoc to their native currencies in the fight to remain strong against the prevailing US Dollar.
Africa and its 54 countries have not been immune to the effect and the impact of the virus but instead of withdrawing from the Forex Market, Forex Trading in African countries has seen a substantial increase, a near explosion, despite the global pandemic.
There are numerous reasons for the influx of African traders in the Forex Market that are worth having a look at as it may very well be a turning point for many native currencies being weighed against the US Dollar.
This increase may also open up avenues for other investments in other financial markets as African traders explore the numerous options associated with trading not only Forex, but other financial instruments as well.
Reasons for the substantial explosion in Forex Trading in African Countries
- More people have been confined to their homes
As Covid-19 spread across the globe, more governments placed strict restrictions on movements in an effort to curb the spread of the virus, resulting in quarantines and lockdowns where a lot of people were confined to their homes for months.
During this time, with growing uncertainty regarding employment and the securing of income and seeking opportunities to secure additional income, more people have looked toward Forex trading for just that.
People have had a lot more time to dedicate towards learning how to trade Forex and time during which they could adopt trading strategies which suited their financial and trading needs and objectives.
African Traders could spend more time improving their trading strategies and back testing them extensively to perform well in volatile market conditions which resulted from the impact of Covid-19 on financial markets.
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- The Forex Market is the largest, most easily accessible market
Even prior to Covid-19 and the impact that it had on the Forex Market especially, the Forex Market was the largest market amidst others and the sudden influx only made this a lot more substantial.
The Forex Market sees approximately $5 trillion worth in trades being executed on a daily basis from right around the world, which subsequently increases the market’s liquidity due to the constant exchange of currencies.
There are numerous Forex brokers that offer favourable trading conditions to traders who are interested in Forex trading and seeing that the Forex Market never sleeps, but operates 24/5, this adds to the influx.
African traders can trade at any given time as markets in different time zones overlap one another and as soon as one market closes, another one opens.
- Low transaction costs
Due to the high liquidity, trades are executed faster, and this results in lowered transaction costs which as a result, provides more African traders, who may not have a lot of capital to trade with, ample opportunity to join the Forex Market.
- Leveraged trading of currency pairs
African traders who do not have a lot of capital to take on larger positions in an effort to increase their chances of great gains and profits can benefit greatly from the fact that Forex is a leveraged financial instrument.
Leverage is a useful tool provided by brokers that African traders can use, despite their initial deposits, to open positions that are substantially larger.
The maximum leverage that brokers offer is determined by the broker, the jurisdiction within which it falls and predominantly by the regulatory entity, or entities, that its regulation is governed by.
Some brokers, such as those under regulation from the FCA, are restricted to providing leverage of 1:30 while other brokers, mostly offshore brokers, are able to provide traders with substantially more leverage, often up to 1:3000.
African traders, however, need to know that leverage is a double edged sword which can increase the chances of profit, but, when used incorrectly or excessively, can expose traders to substantial risks.
These risks may lead to losses that exceed the traders initial capital and it is therefore imperative that African traders understand leverage before applying it, and that it is used correctly in conjunction with risk management protocols and tools provided by brokers.
- Africa’s native currencies are starting to perform better
In the past few months African currencies have weakened greatly due to the impact that Covid-19 has had on various economies.
One of the driving forces behind the price movements of currencies along with exchange rates between them is that of economic situations, and this has affected the strength that currencies display against the US Dollar greatly.
Although, in the past four months, a lot of African currencies have stabilized more, and some are showing more steady increase in value against the prevailing US Dollar as economic situations improve with the phased opening of various economies.
- More brokers are accepting traders from African countries
While a lot of brokers have restrictions pertaining to traders from specific countries being able to trade through them, there are a lot more brokers that are welcoming African countries and their traders in making use of brokers’ services to facilitate trades.
As more African economies see a positive trend in currency value and improved exchange rates, this is likely to open more avenues in being able to trade using the services of more brokers.
- Phased opening of economies
Although the threat of Covid-19 is far from over, more countries are in progress of opening economic activities in a controlled and phased manner to allow for more businesses to open and return to operation.
With the phased opening, economies are set to strengthen, which will positively affect economic situations and inevitable the strength of native currency and the exchange rates between native currencies and others.
Despite the global pandemic, the Forex Market has retained its position as the larges, most liquid market amidst the other markets, with significant influxes seen in recent months, especially from more African countries as more traders start trading Forex.
With economies returning to near-normal, but controlled and safeguarded, operations, there is sure to be further influxes as economic situations improve to have positive impacts on the strength of native currencies and their standings against the US Dollar.