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Forex trading uncovered: How to profit from the rand's fall against the dollar

by , 08 June 2015

On Friday, the rand hit 13-year lows against the dollar. This year, the local currency has been under immense pressure.

If you think the rand's woes are going to continue, you could try to profit from the move. You can do this by forex trading.

So how does this work?

Read on to find out…

Trading forex through the JSE

If you want to trade forex, one option you have is to trade currency futures listed on the Johannesburg Stock Exchange’s Currency Derivatives Market.

As well as being able to trade the rand against the dollar, you can trade a number of other major currencies too.

Let’s see how a trade like this works with the help of an example.

How trading forex works with currency futures

You think the rand’s demise is going to continue, so you decide to place a trade. So you buy 10 dollar/rand contracts at the price of R12.5800.

Each currency futures contract is equal to 1,000 units of the base currency. In our example, this is the dollar.

This means your trade of 10 contracts exposes you to R125,800 (10 x 1,000 x R12.5800).

The JSE’s Currency Derivatives Market sets the margin per contract you have to pay.

If the margin per contract was R566.10, to enter this trade, you need to put down a margin of around R5,661 (R566.10 x 10).

When you put on your trade, you can set your take profit and stop loss levels. For this trade, you set your take profit at R13.1300 and your stop loss at R12.0300.

After a few days, the rand weakens as you predicted against the dollar. Your trade hits its take profit level. So you close your trade and cash in your gains by selling the 10 currency futures contracts at R13.1300.

To calculate your profits, use the following formula:

(Closing price – initial price) x number of contracts x currency exposure

For our example this is a profit of R5,500 ((R13.1300 – R12.5800) x 10 x 1,000 units).

So there you have it. How to profit from the rand’s fall against the dollar.

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Forex trading uncovered: How to profit from the rand's fall against the dollar
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