"Currency futures is the JSE's fastest growing sector," says JSE trading division GM Warren Geers Trade in currency futures on the JSE's YieldX board set a record in 2011 with the value soaring from R49bn in 2010 to R103bn. "Retail clients accounted for 20% of trades by value and 80% by volume," he says.
Futures available on YieldX cover the rand exchange rate against the US dollar, UK pound, euro, Japanese yen and Australian dollar. In a game in which traders take a bet many times the cash margin they put down (gearing), futures are at the lower end of the risk spectrum as currency trading goes. "Gearing on futures is about 18-20 times the margin," says Geers.
This pales into insignificance compared to gearing of up to 400 times offered by online currency brokers. Standard Bank's foreign exchange e-channels head, Rupert Brown, cautions against randomly choosing an online broker. "There are a lot of offerings and prudent selection is advised," he says. "It's also not permissible within the SA exchange control regulations to trade using a credit card issued by an SA bank."
For those seeking a familiar counterparty, Standard Bank offers Standard FX Trader, the only online currency trading platform operated by an SA bank. Clients can trade 48 currency pairs and choose between a standard and a mini account. Accounts can be opened in euros, US dollars or UK pounds.
The standard account requires an initial margin of $2500 and a minimum trade of $100000 and offers gearing of up to 100 times. This gearing can be tailored to a trader's propensity for risk, says Brown.
On the mini account an initial margin of $250 is required and a minimum trade of $10000. This account can be geared up to 200 times. Brown stresses: "Profit and risk potential are massive."
Currency traders' aim is to correctly read market volatility - of which there is no shortage. For example, over the past 12 months the rand's exchange rate against the US dollar has moved 2.9%/week, on average, above and below its underlying trend, which has seen it weaken by 0.3%/week. In theory, a correctly timed 200-times geared $250 position would have yielded an average profit of $1700/week.
Volatility is great if you are on the right side of it but painful if you aren't. Take the three days between September 19 and 22 last year when the rand slumped by 14% against the US dollar. A 200-times geared $250 position backing the rand against the dollar would have left a trader nursing a $7000 loss. Giffen and Brown stress that would-be currency traders must first gain a thorough grasp of the market and trading techniques.
"We offer a two-day course in which we teach the currency market theory, technical analysis and trading strategy," says Giffen. "There are also three coaching sessions." To become a trader will set the pupil back around R20000.
Standard FX Trader's approach is similar. "We provide a risk-free 30-day no-obligation demo account with free training in areas such as the theory of currency markets and fundamental and technical analysis," says Brown. "Simulated trading allows first-time traders to get a feel for the risks involved and enables them to make informed decisions before funding a live account."
Lots of practice is certainly a great idea in a market that epitomises the saying: the bigger the potential gain, the bigger the risk.
Source: Financial Mail
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