Forex trading is the term for buying or selling currency on the international currency market.
This trading happens on the current exchange rate of a currency against other currencies and its fluctuations over time.
Foreign exchange traders aim to make money by buying currency at a lower price (or exchange rate) and selling at a higher price.
Previously, activity on the foreign exchange market was limited to Governments, Banks, and large institutions only. However, for the past 15 years retail traders and speculators have increased their participation in the forex market with the availability of low-cost trading platforms.
The forex market is largest financial market in the world and has an approximate volume of $6.6 trillion USD being traded daily as per latest BIS stats of 2019.
Currently, around 5.5% volume of the global forex market consists of retail and speculative investors.
Emmanuel from Trade Forex Kenya explains that “Forex trading has also been growing in popularity in Kenya and in Africa overall.
“Online Forex trading in Kenya is regulated by the CMA or the Capital Markets Authority since 2018. As a Kenyan FX trader, you should only trade through forex brokers that are licensed by the CMA to operate in Kenya. The license provided by the CMA acts as an assurance that it is safe to trade with such brokers,” he added.
Trading with Regulated Forex Brokers in Kenya
Before you choose to trade through any forex broker, you should ensure that they are well-regulated by a reputable finance authority/regulator.
This is because licensed forex brokers are held accountable by governmental regulators. This ensures that the forex broker observes practices for the safety and security of trader’s funds.
Unregulated forex brokers may use the funds that you have deposited for their own purpose without you being even aware of this practice. In certain cases, this leads to a situation where you cannot withdraw the funds that you have deposited.
Forex traders in Kenya should only trade through forex brokers who are regulated by the CMA, as advised by the CMA.
If there are any fraudulent practices that are committed by a regulated broker, you can take legal recourse against it in Kenya. There can be no legal recourse against unregulated brokers.
Currently, there are only three forex brokers in Kenya that are regulated by the CMA. These three brokers are:
- Pepperstone
- Scope Markets
- FXPesa
All the above brokers offer different types of accounts for different types of traders and for different purposes.
The type of account you should choose should depend on the financial instruments you want to trade, the execution method that you want, the fees you are willing to pay, and so on.
There are certain accounts that are suitable for those who are looking to pay lower fees and want to start by investing a lower amount of capital.
Although, there are also some foreign brokers that are not authorized by CMA catering to Kenyan clients with local deposit options like MPesa, but CMA warns against these brokers as they are not overseen by CMA, as this makes it difficult for investors to get readdress in case of wrong practice by these brokers.
Traders in Kenya should only trade with a CMA regulated broker or with top-tier regulated brokers in Kenya that are authorized by CMA and with at-least 2 Top tier regulators like FCA, ASIC, CySEC.
How to Open a Forex Trading Account in Kenya
There are certain common steps that every Kenyan trader needs to follow before opening an account with a regulated forex broker:
Compare Different Forex Brokers – There are several factors that need to be considered before selecting a broker to trade through.
Some of the most important factors to consider are regulation, deposit methods, financial instruments available, tools available for trading, types of accounts that are offered, fees that they charge, as per this comparison of forex brokers in Kenya by website TradeForexKenya – they have explained the importance of these factors in researching & selecting a trusted broker.
Traders need to do their own comprehensive research and settle on a forex broker that suits their needs.
Account Opening – Once you have selected a suitable forex broker that you want to trade with, a trading account needs to be opened with that forex broker.
A trader will need to select the type of account they want to open. For example, a trader can open an ECN account or a Standard account or a Micro account. The exact procedure for account opening may vary from broker to broker, but the general steps remain the same.
KYC – After the account has opened, certain know-your-customer (KYC) requirements will need to be completed. A trader will need to provide identity proof and so on.
Deposit Funds – Almost every forex broker will have a minimum deposit requirement(s) before a trader can start trading with a Live account.
If you are a beginner, you should start by making a minimum or low deposit and then increase your deposits as your trading experience grows.
Download the Trading Platform and Start Trading – Different forex brokers offer different types of trading platforms.
Some forex brokers offer only desktop trading platforms while others offer platforms for desktops, mobiles, and tablets. After the trading platform has been downloaded and set up on your device, you can start trading.
It is advisable that new traders should first start with a demo account & make demo trades only – to test the trading platform and experiment with their trading strategy. Real money should only be deposited once you have sufficient demo experience of profitable trading.
Managing Your Risks in Forex Trading
Forex trading involves high risk by its very nature. Every trader needs to be aware of the risks that they are taking while forex trading.
You need to deploy effective risk management techniques. Risk management techniques can significantly lower the risk that a trader faces and can help to minimize or avoid potential losses.
Risks of Forex Trading
- High leverage – Forex brokers generally offer traders a high amount of leverage. This means that traders can trade with much more money than the capital they have invested.This means that traders have a chance of making higher profits but it also means that they can lose much more money than they have invested.
- High Volatility – Changes in the exchange rate of currencies take place at a high frequency. Forex market is one of the most volatile financial market and this increases the risk for traders because they can lose more money more quickly.
Risk Management Tools
Before one should start trading with a forex broker, they need to check the risk management tools that are being offered. Ask your broker if they offer these following risk management tools:
Safe Custom Leverage
Most brokers offer you the option to choose the ratio of your leverage in a trade. Most brokers in Kenya offer 1:400 leverage, but you have the option to choose your own leverage per trade. This gives you the option to control your risk. As a rule, you should not use more than 1:10 leverage.
Stop-loss Orders
Stop-loss orders can be set along with any buy or sell trade. This means that the trade will be closed automatically at the set price, if there is an unfavorable movement of the currency and this unfavorable movement crosses a certain limit.
Hence, it allows you set a maximum level of loss that you are willing to face on an individual trade. Traders should always set stop-loss orders with every trade they enter into.
Guaranteed Stop Losses
A guaranteed stop loss means that you cannot lose more money than your preset stop-loss order under any circumstances.
Sometimes if a currency value changes very fast, there is a slippage. You may not be able to exit the trade at the exact price of your stop loss. A guaranteed stop-loss is a solution to slippage during very volatile market conditions.
Negative Balance Protection
Negative balance protection means a trader cannot lose more money than they have deposited. However, different brokers have a different interpretation of what that means.
A traders should check the fine print of their broker & talk to the broker about this to understand what kind of negative balance protection they will get.
Deal Cancellation
Deal cancellation allows you to cancel a trade that has been entered within a certain time limit. A trader can enable deal cancellation before entering into the trade, if your broker offers it. But very few brokers offer this feature.
Common Mistakes to Avoid
There are certain common mistakes that a new forex trader needs to avoid. It is not advised to use high leverage, especially if you are a new trader as the losses can be much higher due to high leverage.
Furthermore, a trader should never invest more money than they are prepared to lose. Investing or trading in forex markets is inherently risky and these markets are highly unpredictable. Hence, a trader needs to be prepared to face a complete loss.
Traders should never use unregulated brokers. They are unsafe to trade with and a trader may lose all the money that they have deposited into their trading accounts. Unregulated brokers may also be conducting fraudulent practices which could adversely affect a trader.
Traders should never follow trading advice blindly. Traders need to do their own research before investing their money.
It is advisable to use a leverage of 1:10 with a risk to reward ratio of atleast 1:2. Also, educating oneself on the basic concepts of forex trading is crucial.
Before starting to trade with actual money, a new trader should test their trading strategy through demo accounts.
Conclusion
Forex market is risky even in the best circumstances as there are so many factors that affect the currency price movements.
Currency based instruments such as forex derivatives & CFDs are highly volatile financial instruments and are riskier & more unpredictable than any other financial instrument available to investors.
Forex market is not for value investors or long-term investors and is more suited to day traders and speculators which requires educating yourself on details of many economic & technical factors.
It is even more risky for beginners because of its complex nature and one must have years of experience before they begin to understand the analysis, tools to track the movements of the forex market.
Even the experienced of traders can’t track currency movements accurately most of the time.
If you are completely new to the financial markets, then it is advisable that you start by investing in stocks, bonds, and mutual funds. The risk associated with these financial markets are lower than in the forex market.
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