Business and Technology

How South Africans Can Mitigate Risks of Online Trading

Online trading is becoming popular in South Africa. So many factors are responsible for this phenomenon.

One of the factors responsible for this rise, is accessibility I.e., the availability of the internet. This has made it possible for individuals to participate in the retail forex market, irrespective of their location. 

To give an estimate, as of 2019, the average daily volume of forex trading in South Africa hovered around $20 billion according to BIS survey, although much of it is not related to retail trading.

Many South Africans are attracted to online trading due to the profit and promise of it being a legit way to make quick, cool cash. 

That few people make a profit from online trading does not eliminate the risk involved in the venture. The risks involved range from flagrant abuse of leverage, scam brokers, trading with unregulated brokers, hackers etc. 

Proper risk management strategies can help minimize losses, and protect a trader’s account. Risks management is an important aspect of online trading as a trader’s profit can be lost in a short time, if he acts carelessly. 

Which strategies can you use to mitigate the risks involved in online trading, and get a successful trading experience as an online trader? We will try to answer that.

The following are ways of mitigating the risks involved in online trading. 

Always Trade with FSCA regulated brokers

The importance of trading with a regulated broker cannot be overemphasized. It provides security of investment, as well as legal backing, in the event that any illegal practice is carried out from the broker’s end. 

In South Africa, the Financial Sector Conduct Authority (FSCA) is the statutory government agency established by law specifically to regulate the conduct of financial service providers. This includes Banks, stock brokers, fund managers, online forex brokers, and other financial service providers. 

Every broker is assigned a special Financial Service Provider number (FSP number) which can be used to verify their authenticity. When choosing a broker for your online trade, ensure you choose one that is licensed by the FSCA.

Visit the FSCA website & go to the FSP search to confirm if your broker is regulated. Check the Products approved to verify that the broker is authorized to offer the product you are trading.  

Trading with an unregulated broker opens you up to risks such as having little or no recourse in case you have problems, having no protection against mistreatment etc. 

Avoid Excessive Leverage

Leverage is using borrowed money to open large trading positions in using little deposit. Leverage gives you the opportunity to make profits larger than their deposit can make. 

The FSCA has not placed any limit on the amount of leverage the forex & CFD brokers can extend to their clients, so South African forex brokers can offer very high leverage on forex & on CFDs on instruments like Commodities, metals; sometimes some brokers offer as high as 1:1000.

However, it is a double-edged sword as it can lead to you losing your capital if done excessively. This illustration will describe how leverage works. 

Imagine you open a trade with R100 with leverage of 1:100. If the market moves 10% upward, you ought to make R10 profit, however the 1:100 leverage will increase your profit to R1, 000. This is because the leverage has increased your trading capital to R10, 000 instead of R100. 

However, if the market moves ten percent down, you will lose R1, 000 which is more than your initial trading capital of R100 and still be owing the broker around R900. 

To mitigate the risk of online trading, it is advised you avoid excessive leverage. The most appropriate leverage for retail traders is 1:5 for forex. This is considered most appropriate since it does not expose you to too much loss in the event the trade goes south. 

Start with a small account if you are new

If you are a new online forex trader, it is advised you start with a small lot size. Lot is the unit of measurement that standardises contract sizes. There are four lot sizes in online forex trading namely: 

  • Nano lot- 100 units of currency
  • Micro lot- 1,000 units of currency
  • Mini lot- 10,000 units of currency
  • Standard lot- 100,000 units of currency

Lot sizes ensures you trade a set amount, and know the quantity you’re trading when you open a position. 

As a new trader, you should determine your risk level before choosing a lot size to trade. This will help you secure your capital. Trading a high lot size will easily blow your account deposit. 

Also, start with a small amount of trading capital. It is advised you invest an amount you can afford to lose. Do not invest all your savings as a beginner. 

Use Risk management tools

These are also ways to manage the risk in online trading. So what do they mean? A stop order usually called “stop-loss order”, is an order to buy or sell securities when they reach a particular price.

 A buy stop order tells the broker to buy an asset at the next available price, once the asset prices crosses a pre-set “stop price” which will usually be higher than the current market price. 

A sell stop order is used to sell an asset once the price drops below a pre-set “stop price” which is always set below the market price. 

A Guaranteed Stop Loss Order (GSLO) is a risk management strategy that ensures your trading positions are always closed at your pre-set stop price. It helps prevent traders from losing by removing the risk of slippage. 

A limit order is an order to buy a financial asset at a specific price or better. For buy limit orders, they are executed at a specific price or lower while sell limit orders are executed at a specific price or higher than the limit price or exactly the limit price.

These trading strategies are employed to manage market risk, especially during periods when the market is highly volatile.

The trading platforms deployed by many brokers have these features. They are most appropriate when you take online trading as a part-time activity and will not have the time to monitor the market all the time. 

Enable Two-Factor Authentication (2FA) and Use Strong Passwords

These are strategies aimed at protecting your account against hackers.

2FA is an extra layer of security aimed at convincing the computer system that you are who you say you are. 

It requires you to provide two different kinds of information such as a password, and a verification code contained in a text message sent to your phone, to authenticate your identity. The use of 2FA is becoming very common, as it helps protect your account in the event someone gets hold of your password remotely.

It is advised you enable 2FA on your online trading account, to reduce the risk of hacking; since these hackers can get hold of your password anytime. 

Also, remember to never share your 2FA code with anyone, as it can be used by hackers to gain access to your account.

Another strategy deployed to mitigate the risk of hacking is the use of strong passwords. Don’t just use a name or number as your password. A typical strong password should contain numbers, letters (upper and lower case) and special characters. 

This will ensure that the password will be difficult to predict or guess by hackers. Do not use your name or date of birth as passwords as these can easily be guessed by hackers. 

Review your trading account statements regularly 

One way to mitigate risk in online trading is by regularly checking your trading account history. This ensures that no one has access or has tampered with your account and also ensures your holding and portfolio reflects your investment decisions. 

By checking your account regularly, you understand the status of your account and where you are in your investment journey. You can also spot any illegal withdrawal of funds.

Avoid Using a Public Wi-Fi

One way hackers or individuals with questionable characters steal from unsuspecting victims online is through Wi-Fi spoofing. What is Wi-Fi spoofing? It is setting up an unencrypted Wi-Fi network to lure in users looking for free data. 

A hacker can set up his Wi-Fi in a hotel and give the Wi-Fi a name that corresponds to the name of the hotel. Unsuspecting people may think the Wi-Fi is run by the hotel and assume it must be safe. 

On connecting to the Wi-Fi connection, your activities will be monitored by the hacker. If you log into your Bank or Trading account, your password details, credit card number etc., will be seen by the hacker. 

This is a threat to your online trading and to mitigate this risk, it is advised you do not use any public Wi-Fi unless you’re certain it is safe and secured. Also, you can avoid logging into your financial applications when using a public Wi-Fi connection. 

Use Caution as there are Unavoidable Risks

Online trading carries undeniable risk and if you must trade, risk management should be your priority. Avoid scam brokers by verifying their credentials and FSP numbers from the FSCA website, and avoid using excessive leverage to trade.

Create strong passwords and avoid free Wi-Fi connections and review your account statement every now and then, to be sure no funds are lost.

Remember to use stop loss orders to manage your risk, and never trade with more than you can afford to lose.