Online Forex trading has grown exponentially in popularity over the past ten years. Historically, forex trading was reserved for large institutions like Governments, Banks and Corporations.
However, now with retail forex trading, individual investors and traders can also participate in the forex market. This has been made possible by changes in trading technologies, regulations which allowed low cost brokers to offer services to individual investors and traders. Currently, according to BIS, around $6.6 trillion is traded daily in the global forex market out of which about 3% is retail driven.
The Kenyan forex market also has had significant growth as it now has approximately 70,000+ active retail traders. Many globally leading forex brokers operate in Kenya some of these brokers are also regulated by the Capital Markets Authority or the CMA.
Kenyan forex traders should be very careful while choosing a broker to trade forex online as it can expose you to a lot of risk if the broker is unregulated.
New forex traders should also be aware of the inherent risks involved with trading in the forex market as currency movements are highly volatile and trades are not necessarily profitable, there is a high risk of losing money.
Here are 6 things about forex trading that every Kenyan forex trader needs to be aware of.
In this article
Forex Trading is Risky and about 60% of Traders Lose Money
Forex trading is a high-risk way of making money. Profits are not guaranteed in the forex market, and around 60% of all forex traders lose more money than they gain. This is because forex markets are notoriously unpredictable. It is highly difficult to consistently make trades that make money for you over a period of time.
There are no proven strategies that are guaranteed to work while trading in forex. If someone promises that they have a method that will allow you to always make profits in this market, then you should beware of them. Institutional investors such as multinational banks also lose money on forex trades even though they have the best talent and use the best tools & techniques to make informed trades.
If you are a new trader, then you need to start trading through a demo account. This means that you are not trading with actual money. However, you will gain valuable experience about the forex market and how it works through this. Always rely on rational thinking rather than emotions when trading.
As a rule of thumb, you should never trade with more money than you are willing to lose. This will ensure that you are financially secure even if your trades do not work out or turn into a significant loss. Also, only trade with forex brokers that offer negative balance protection. This means that you cannot lose more money than you have deposited in your trading account.
Forex Market is Highly Volatile
The currency market or the forex market is one of the most volatile markets in the world. The exchange rates between currencies change quickly and it can be hard to keep track of their movements. The movements in the exchange rate is caused by the volume of trades that are taking place. However, a high volume of trading does not necessarily mean that the exchange rate will be more volatile if the trades balance each other out.
The high volatility of the forex market means that you can lose a lot of money in a very short period of time if you have entered into a bad trade. Even though this high volatility can also lead to large profits, traders need to be very cautious while making trades in this market.
Due to the high volatility of the forex market, traders need to ensure that they are closely monitoring their trades. Since the forex market is open 24 hours a day during all weekdays, traders need to keep one eye on the markets at all times.
Forex is a Leveraged Instrument
Almost every retail forex broker offers forex trading with leverage. Trading a leveraged instrument has its own pros and cons. A leverage instrument means that you do not need to put up the full cost of your trade. For example, if an instrument is offered at leverage of 1:100, then that means you can do a trade worth $100 by only using $1 of your own money.
This is achieved by the best forex brokers by offering forex trading through spread betting or as CFDs. While trading forex, you need to be even more cautious because of the leverage.
Even though the leverage can lead to more profitability if you are in a right trade, but it can just as easily lead to higher losses if you are not. This is because of the high value of the trade you can enter through leverage.
Trade Forex Kenya advises “While trading with leverage, forex traders should always ensure that they have negative balance protection. Another technique for reducing your risk is to trade using stop losses. A stop loss ensures that you exit your trade before your loss exceeds a certain amount.”
There are various tools that help you reduce the risk associated with your trades. If you are a new forex trader, you need to learn these techniques and make sure that you use them.
You Don’t Own Actual Currency
When you trade in the forex market, you do not actually own the currency that you are trading. For example, if you are trading the EUR/USD currency and you have shorted the EUR in favour of the USD, this does not mean that you gain USD currency equivalent to the value you have shorted.
This is because you are trading currency as a derivative instrument that depends on the change in the value of the EUR/USD. You are not actually exchanging any currency. This derivative instrument allows you to make long or short bets based on the currency fluctuations in the market.
This is different from trading stocks. In stock trading, if you enter into a long position on a stock and hold that position for more than a trading day, then you become a shareholder of that company. Normally, a share trader would have a share trading account with a stock broker in order to facilitate the trades, the stocks are held in your name in your account with the broker and the exchange, for example traders at NSE need to have a CDS account.
Hence, traders in the forex market need to be aware that they are actually trading using a derivative instrument and you cannot literally enter into possession of foreign currency while trading through the forex market.
Brokers Charge a Transaction Cost for Trading
Every trade that you make through a forex broker has a cost attached to it. This cost is how the forex brokers make their money. The forex brokers will charge you for each trade by adding a fee which is called a spread. The spread is counted through pips. The higher the number of pips, the more the forex broker is charging from you.
Different forex brokers charge different spreads for different instruments and accounts types. Hence, before choosing a forex broker to trade through, you need to know the spreads that they charge. Each broker charges a different spread for each currency pair. For example, the charge for trading an EUR/USD will be different than the spread that may be charged for trading AUD/USD.
Hence, you should make a note of the currency pairs that you want to trade and check the spreads for each of these currency pairs with different brokers. You may also use the benchmark EURUSD currency pair as a way to gauge how expensive a broker is.
Further, different spreads are charged by the same broker for the same currency pair at different times. Hence, you need to look at the average spread that is being charged.
Choosing a Good Forex Broker Matters
You should only trade through a forex broker that is trusted, offers the best forex webinar and has good reputation in the industry. This is important because fraudulent practices are rampant in the forex trading industry.
A lot of forex brokers out there are unregulated and they can engage in practices that is harmful for the traders that are trading through them. For example, a forex broker can use the money that has been deposited by traders for their own purposes. They may also end up losing such money and may be unable to return the deposit to the traders.
Whether you can trust a broker or not can be judged from the different regulators that a broker has a license from. For example, if a broker holds licenses from reputed regulatory authorities like FCA or ASIC or CySEC, then such a broker may be considered to be reliable.
For Kenyan traders, trading through a broker that is licensed by the CMA is advised, as they can have legal redressal in case of wrongful practices by a broker. The local regulation & presence provides more accountability to local traders.
For example, traders can consider trading through Pepperstone since it is regulated by the CMA along with the FCA and the ASIC and also has a local office here.
Forex Traders should only choose a forex broker that is highly regulated and has a good reputation.
Final Thoughts
Before starting to trade, every aspiring forex trader should conduct proper research in order to understand the ins and outs of the forex market. They should also find out about the best trading techniques and other practices to follow while trading in the forex market.
However, forex traders should not blindly follow specific trading advice given by anyone else, but rather use their own judgement. There is a lot to learn when it comes to forex trading, but it can be worth it in the long run.
