If a Forex broker has an office in South Africa, it has to be regulated by the Financial Sector Conduct Authority (FSCA). The FSCA is a national authority with the power to shut down brokers if they suspect them of cheating their clients or operating in an unethical manner, as happened to JP Markets last year.
But just because the FSCA has the power to enforce regulations and shut down badly behaved brokers, doesn’t mean that they catch everyone trying to scam South Africans out of their money. For every unethical broker, there are dozens of individual con-artists using Forex trading as a disguise to cheat their victims. Luckily, there are a few simple tricks to avoid being scammed and finding a reliable Forex broker to trade with.
Do Your Own Research
A study conducted by TradeForexSA in 2020 found that Facebook and Instagram were the sources of more than 50% of Forex scams, mainly by individuals using social networks as a hunting ground for naïve victims. It is well known that Facebook and Instagram have problems with content moderation. Both companies often fail to catch scams before they take place and have a poor record in banning those that have been accused of scams.
The best way to avoid falling into this trap is to conduct your own research. The FSCA keeps a register of all regulated Forex brokers licenced to operate in South Africa. Any broker, or individual, offering a financial service in South Africa must register as a Financial Service Provider (FSP) and all good brokers will have this FSP number listed at the bottom of their websites. If you are approached by someone on social media - whether it be Facebook, Instagram, WhatsApp, or Telegram – always investigate thoroughly before parting with any money.
Make Sure Your Broker Is Regulated
While the FSCA is the South African regulator, there are many other regulators around the world. Current conventional wisdom is that the UK’s Financial Conduct Authority (FCA), the Australian Securities and Investment Commission (ASIC), the Monetary Authority of Singapore (MAS), and the Cyprus Securities and Exchange Commission (CySEC) in the EU are most rigorous regulators in the world. If your broker is not regulated by the FSCA but has a licence with one of these other authorities, you can consider them safe to trade with. Beware of brokers who are “registered” in countries like St Vincent and the Grenadines, the Marshall Islands and Vanuatu. While these small island nations will give business licences to Forex brokers, they do not provide any oversight, regulation, or enforcement. Trading with unregulated brokers is dangerous; traders have no guarantee that they are not being cheated and, in the event of a dispute, traders have no way of getting their money back.
Ensure That Your Broker’s Demo Account Doesn’t Expire
All Forex brokers will offer a demo account. Demo accounts offer beginner traders access to the live market but with virtual money, providing a risk-free way to learn how to trade, experiment with different assets, and test new strategies. Unfortunately, some brokers will place a time-limit on their demo accounts, usually 2-4 weeks. After this period, the demo account will expire, forcing beginner traders to start using a real account and trading with their own money. Forex trading is complex, high-risk and requires a solid understanding of finance, economics, technical analysis, and the trading platform used. It is not something that can be learned in a few weeks. When looking for a good broker, make sure their demo account is unlimited. Even after beginner traders graduate to using a real account and their own money, unlimited demo accounts are invaluable for testing new strategies.
Calculate Your Broker’s Trading Costs
Forex brokers provide traders with access to the Forex market and for this they charge fees. By totalling these fees, you can find the final trading cost. Trading costs vary widely between brokers, so it’s always important to calculate them before you spend any money. While the most obvious cost to a trader is the initial deposit, this is not a fee. The deposit is the money you will be trading with and will not be paid to the broker – but will instead be kept in a trading account. The three main fees charged by brokers are the spread, the commission, and the overnight swap fee.
- The spread is the difference between the sell price and buy price of an asset and is measured in pips. The smaller - or “tighter” - the spread, the cheaper it will be to place a trade. Some brokers will offer very tight spreads (sometimes as low as 0 pips) but will instead charge a commission.
- Commission is charged when a trade is opened and again when it is closed. The total of these two commissions is called the “round turn” commission.
- The final fee is the overnight swap fee. This is the fee charged by the broker for keeping a trading position open overnight. The swap fee varies between brokers, so it’s always worth checking before keeping a trade open overnight.
A common method of checking trading costs is to look at the spread and commission when trading one lot (100,000 units) of EUR/USD. The EUR/USD is the most traded currency pair in the world and should have the lowest spread of all the currency pairs offered by a Forex broker. A good Forex broker will either have a EUR/USD spread below 1 pip and no commission, or a EUR/USD spread around 0.1 pips and a round turn commission of 6 or 7 US Dollars.
It’s important to remember that Forex trading is high-risk speculation and 60-90% of South African Forex traders lose money. In order to be successful, traders need to approach the Forex market with caution, respect, and a willingness to learn. And there is certainly no need to make Forex trading even riskier by working with an unscrupulous Forex broker.