Currency exchange is trendy. Traders work in the largest financial market. They can make money from any device — even a smartphone! In 2021, the opportunities for financial freedom are spectacular. However, by choosing the wrong intermediary, you set yourself up for failure. Some Forex brokers in South Africa are shady, to say the least. Learn to spot the typical red flags, so your money is safe.
What Does a Broker Do?
The foreign exchange is a gigantic global market, but it does not have a physical centre. All operations are electronic, so buyers and sellers connect online. Their interaction takes place via digital environments like MetaTrader 5. You cannot use the software without official access. Gaining it requires registration with a broker.
A broker is, in essence, the middleman between you and the global market. It may not be bypassed. The company offers a range of services:
- registers demo accounts for training purposes;
- registers live accounts for real-money trading;
- provides software (including proprietary solutions);
- offers support through different communication channels (e.g., email and phone);
- provides various educational content, from articles to webinars;
- processes all financial transactions;
- arranges Forex trading competitions, etc.
Where Is It Licensed?
Absence of a license is a telling sign. Lawful businesses may be registered in different jurisdictions. For example, the Forextime broker has official approval from such reputable entities as the FCA (FSA) in the United Kingdom, the FSCA in South Africa, and the CySEC in Cyprus. Information on the Forex trading website attests to its compliance with industry norms. Naturally, an FSCA license is particularly important for credibility in South Africa.
Licensed brokers offer negative balance protection. This means that if their client makes a loss, its size never exceeds their current balance. If your strategy is hopelessly wrong, you will never end up in the red. Your funds are kept separate from the corporate capital, and you may be entitled to compensation if the company goes under.
Any unlicensed broker is a scammer. They may try to lure you in with generous welcome offers (e.g., unrealistic sign-up bonuses for no-deposit trading). Remember that a website with an elaborate design may be created in a week. Reputation, on the other hand, takes years to build.
ECN or Market Maker?
These are two existing models of brokerage. Companies classified as market makers ‘make the market.’ This means their own currency rates deviate from the actual market quotes, as the costs are included. This difference is insignificant as fierce competition forces all players to offer tight spreads.
ECNs, or electronic communication networks, charge a commission per trade. Their clients see streaming quotes directly from the market. While market makers are their own liquidity providers, ECNs are not. This means that your profit is not paid from the company’s funds. ECNs connect you to other liquidity providers and gain commission regardless of your results.
In theory, market makers have an opportunity to manipulate their pricing. Besides, their interests are in opposition to those of traders. In reality, market makers may be perfectly reliable providers. Reputable big brands, such as FXTM, offer both types of accounts. Thus, you may decide how to structure your costs — whether to pay a commission or agree to slightly different Ask and Bid.
Steer Clear of Forex Fraudsters
Sadly, as Forex is so popular, scammers take advantage of inexperienced traders. Examine the website of your potential provider. Do you see any of the red flags listed below?
- no physical address;
- no phone number (or non-existent one);
- no licensing details (license number and the issuing organization);
- no demo accounts;
- promotion of forex as a way to get rich quickly;
- no mention of trading risks.
Demo Mode
Reliable brokers provide ample educational resources and demos are essential. These accounts unlock the software as a simulator, so users may practice for free. As a rule, demo trading is free and unlimited. Any company that encourages you to fund a live account straight away is dubious.
Check Real Feedback
Visit review sites to see how experts feel about the broker. Search for customer feedback in online communities or forums. Evaluate it critically: 5-star reviews may be fake, particularly if they all look similar and lack detail. As scam is common, do your homework well.
The Bottom Line
To sum up, a trustworthy broker is an officially licensed provider of financial services. In South Africa, brokers are licensed by the FSCA. The biggest companies serve millions of clients worldwide. They have impressive collections of industry awards and high ratings on review platforms. Choosing a broker is the primary step for any Forex neophyte. Follow our tips to find a company that will help you build a trading career.