Forex trading is popular among traders and investors around the globe. The currency markets are open 24 hours a day with a large volume of trades leading to higher liquidity. In recent years, the demand for forex trading has been growing Kenya.
According to the most recent estimates, there are more than 70,000 traders who participate in forex trading. One of the reasons for the growth in popularity of forex trading in Kenya is that the CMA has started regulating the sector since 2018.
Even though the sector is regulated, it carries a high amount of risk. Therefore, first-time traders should be wary of the pitfalls associated with forex trading.
According to local website Trade Forex Kenya, “Traders need to educate themselves on the basics of the Forex market and learn safe trading practices like risk management before actually investing in forex.”
“Every trader needs to deploy proper risk management techniques so that losses could be mitigated.”
Let’s take a look at a few tips that need to be kept in mind before diving into the currency markets.
Educate yourself before trading
It is critical to know your way around forex trading before you start investing real money. You should start by finding out the basics such as how to make forex trades, how to manage your risk, what are the active trading times, what do the common forex trading terms mean, how to conduct market research, what makes the currency market fluctuate, and so on.
Once you know the basics, you should start by opening a demo account with an established forex broker. This demo account will allow you to practise trading without using actual money and help you find your way around a trading platform or app.
Experience is the best teacher when it comes to forex trading, and don’t worry if you make a lot of bad trades when you first start out. The most important thing is to keep learning.
Only start trading with real money once you know have understood and practised the basics.
Only trade with CMA-regulated brokers
A forex broker carries out your trades in the forex market and holds your money in its account to allow you trade. Not all forex brokers are regulated, and it is important to only trade with regulated brokers.
In Kenya, there are only three forex brokers that are regulated by the CMA (Capital Markets Authority of Kenya) licensed as Non – Dealing Online FX Brokers. They are Pepperstone Kenya, EGM Securities (FXPesa), and Scope Markets (SCFM Limited).
Regulation means that CMA has oversight over these brokers and does not allow any unfair practices, fraud, or excessive risk.
There are several benefits to trading only with regulated brokers in the forex market. A regulated forex broker offers a transparent trading environment. They cannot manipulate the market and they need to submit periodical financial reports to the regulator viz. CMA.
A regulated forex broker needs to keep your funds separate from its own funds. Hence, it cannot use your money to conduct its own operations or transactions. This means that your money stays safe and protected for you to use.
The Kenyan regulator CMA protects you from any fraudulent practices of brokers and in case you experience any fraud, you can approach the justice system to seek damages but only if you traded with a regulated forex broker.
Compare trading costs
Different forex brokers charge different fees. The overall cost that you would incur when trading with any broker will be different.
Before you choose a broker to trade with, you need to check the overall cost associated with trading with it.
There are four major components to the overall cost of trading. The spread, commissions, overnight charges, and other hidden fees such as deposit and withdrawal fees or inactivity fees.
For example, if you want to buy EUR/USD at a live price of 1.1000, your broker will show you the bid price and ask price. You will need to pay a higher price to buy EUR/USD (say around 1.1002) and the difference in price will go to the broker as revenue – called the spread.
Similarly, the broker may charge an additional commission on each trade that you make. Additionally, if you make a trade and hold it overnight, you will need to pay overnight charges that are associated with each currency pair.
You need to check how much your overall costs will be for trading with any forex broker.
Use leverage with caution
Forex trading allows you to use leverage. Every broker offers different leverage. Your broker may be offering 1:100 leverage. This means that you can enter into trades worth $100 by investing only $1 of your money.
Even though leverage can increase your profit margins, it also amplifies your losses.
For example, suppose you have $100 in your trading account and you use the entire money to buy EUR/USD using 1:100 leverage at the price of 1.1000. With $100 by using 1:100 leverage, this would mean that you can place buy order worth $10,000 on EUR/USD.
Suppose the price of EUR/USD drops to 1.0050 (50 pips down), this would mean a loss of $50 for you and 50 per cent of your entire capital will be wiped out in a single trade.
Use risk management tools
There are several risk management tools such as stop-loss, negative balance protection, risk-reward ratio, etc., which can help you manage your risk associated with every trade.
You should use all or any of these techniques every time you trade so that you do not experience excessive or unforeseen losses.
For example, a guaranteed stop loss ensures that you exit from a trade before your losses exceed a certain amount.
If you want to make sustained profits while trading in the forex markets, then you need to understand all these risk management techniques and how to use them effectively.
Always make sure that you have at-least 1-2 risk-to-reward ratio for any trade that you place.
Research and gain experience
There are two ways to start trading more effectively and profitably.
You need to read as much literature on forex trading as you can. You also need to practice your hand at trading on demo before investing any money. You should do your own research on every currency pair that you intend to trade rather than following any ‘expert’ trade advice or calls.
You must also keep abreast of international news and know how it affects the price of different currencies.
For example, the current trade war between the US & China, and risk aversion due to the coronavirus situation is having a large effect on the price of many emerging market currencies.
Review your past performance
To grow as a trader, you need to learn from your past mistakes.
After every trade, you should take some time to review that trade and figure out what you could have done better. You should study your own emotions while trading and try to trade analytically – relying on fundamentals & technical analysis as much as possible without letting your emotion get in the way.
While trading, rely on your past experiences and the past history of the currency market to make informed decisions. Making sustained profits in forex trading takes time and effort, and there are no shortcuts to becoming a good trader.
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