Forex trading has been increasingly gaining popularity in recent years. According to BIS, nearly $6.6 trillion is traded daily over the globe on an average. Due to its high liquidity, 24-hour nature, low transactional cost, fast paced regulations, easy to use platforms, the Forex market has become the largest financial market and is constantly increasing at a rapid pace.
Kenya now has over 70,000 forex traders according to recent estimates and market is well regulated by CMA and there are 3 regulated forex brokers”, as per local website Trade Forex Kenya.
Forex trading involves speculating on prices of currency pairs that fluctuate all the time due to international affairs. Traders often use margin trading to speculate on currencies, the involvement of leverage and margin increases the risk factors for traders, due to which sometimes they even risk losing more than invested amount.
Forex market is quite risky for new as well as experienced traders.
So, for new investors looking to trade forex, it’s important to have proper understanding of the risks and how they can reduce their exposure to these risks.
The risks in Forex trading cannot be eliminated however with proper knowledge, experience, and several precautionary measures, the risks can be mitigated and reduced to some extent.
We look at these risks and how one can protect themselves against these risks.
How can Kenyans trade Forex?
Forex trading means buying and selling of currency pairs like USD/EUR at varying prices. Kenyans can trade in the foreign exchange market through any Retail CFD or Forex Broker in Kenya.
How does Trading through a Retail Forex & CFD Brokerwork –Traders using retail Forex and CFD broker do not own the asset or currency physically, but only speculate on the price movements of currency pair via CFD instrument created by the broker. It is the most common way to trade Forex online in Kenya.
Forex Regulation in Kenya
The Capital Markets Authority (CMA) of Kenya is the regulatory authority that monitors financial conduct in Kenya. Every Forex broker based in Kenya has to be authorized by CMA to serve Kenyan customers. There are also some brokers who are not based in Kenya that serve Kenyan traders, this is against CMA regulations and CMA advises traders against using such brokers.
Choosing a Trusted Broker
There several regulatory authorities around the world. Most famous of them are FCA of UK, NFA of the US, CySEC of Cyprus and ASIC of Australia, CMA of Kenya.
A good broker has to be regulated by a trusted regulatory authority. And if the broker is regulated by more than one top regulatory authority than it’s a good sign of trust. For example: Pepper stone regulated by CMA is also regulated by ASIC & FCA.
Steps involved in Forex Trading
1) The first step of forex trading for any new trader is to make a choice by comparing and selecting an ideal broker for oneself.
There are 3 Forex & CFD brokers that are available in Kenya that provide retail Forex trading. Each broker has different trust factors like some are regulated by multiple regulatory authorities while some offer different services depending on the leverage ratio, types of accounts, spreads, minimum deposits, wide range of instruments and various other factors.
Choosing the broker with higher number of regulations will enhance the safety of traders. First thing for Kenyan traders is to look into CMA regulation of broker then other Tier 1 regulations if required. Brokers regulated with CMA & other Tier 1 authority is a positive sign.
Regulatory authorities like CMA, FCA& ASIC provide better protection to the traders and the traders must seek for the brokers that are well regulated. Better regulation will mean lesser chances of fraud, safe trading environment with restriction on leverage and better downside protection.
The brokers should be compared on multiple bases and the most convenient one should be chosen with reasonable and effective features.
2) After choosing the broker, second step is to choose an account type as per the requirements of the trader. Different account types might have different fees, minimum deposit/withdrawal, and various other features.
3) Once the broker and account type are compared and you have chosen a broker, you can sign up as an individual or open a corporate account if you are a company. For this you need to fill up the broker’s KYC form with basic details, and submit the ID proofs to complete the KYC at the broker.
Once KYC is complete, you can deposit the funds &start trading. Traders can also choose a demo account at the broker to test their trading environment & other features before depositing money.
What are the Risks Involved?
In order to mitigate the risk, it is essential to identify them. The risks involved in Forex trading can be grouped into 4 main categories:
- Volatility in Market: Forex market can be highly volatile and the price movements can be difficult to predict even for experienced traders. The market is active 24 hours a day and depends on multiple factors throughout the world. Any economic activity in any corner of the world can fluctuate the expected price movement of the currency pair. This movement is hard to predict even after detailed fundamental and technical analysis. Like, the high market volatility during Swiss Franc Uncapping, major & emerging markets currency volatility, oil price crash during the Covid-19 crisis – which caused huge losses even to seasoned investors.
- Risk of Leverage/margin: Money can be borrowed from the broker for Forex and CFD trading. The borrowed amount is called leverage which allows traders to open higher positions than the amount invested. Higher exposure leads to higher risk and sometimes the losses can even exceed the invested amount.
- Unfair Practices by Broker: Brokers can indulge in malpractices for self-interest which can result in traders losing their investments. Choosing a well-regulated and experienced broker with positive reviews is important to mitigate this risk component.
- Over Trading: Forex market is highly liquid and profit margin can manipulate the traders’ emotions. Sometimes your greed or fear of missing out can lead to investing more than you are willing to lose.
How can investors ensure their safety while investing in forex?
Traders must understand that there will always be an element of risk involved in forex trading. The risk can be reduced to some extent but can never be eliminated.
The following measures can be helpful in reducing the risks to the lowest levels.
- Educate Yourself: “Investment in knowledge pays the best interest”. A successful trader must educate oneself to analyze the potential impact of any international activity concerning price movements of currency pairs. Traders must also be able to understand &execute an impactful fundamental and technical analysis of the currency pairs.
- Trade with a Reputed Broker: Lesser fees and commission should not be the only aspect to select the broker. One must check the broker’s reputation in the market, positive reviews, and ensure it is well regulated. A broker that has been operational for a long term would be more promising over new, unregulated and lesser reviewed broker.
- Use Safe Leverage: Use of leverage can surely increase the potential gains in a successful trade but it will also increase the risk factor at the same time. Some brokers offer a very high leverage ratio which looks attractive to many traders but it is quite risky. Any leverage ratio of higher than 10:1 is considered unsafe for traders.
- Use of Risk Management Tools: Most of the reputed Forex brokers in Kenya offer risk management tools like stop loss, negative balance protection, limit order, etc. These tools can be used to reduce the risk factors and increase the probability of sustained profits.
- Risk to Reward Ratio: It is a ratio that depicts the risk involved for a possible gain in a trade. The risk to reward ratio is different for every trade order and ideally should be more than 1:2.
Is Forex Trading for You?
New traders must understand that the Forex market is highly volatile and even after taking all the precautionary steps, there is no surety of positive returns and not a sure way to earn money. It involves high risk and might not be suitable for inexperienced traders. Nearly 60-70 percent of the traders lose money and the majority of them are beginners.
Those who cannot handle the volatility of currency pairs must opt for safer market alternatives like mutual funds, bonds, stocks, etc. which are comparatively less risky.
Nevertheless, Forex market is for you only if you are an experienced trader willing to take the risk in the foreign exchange market. A decent experience is required to get a grasp on the price movements of currency pairs, the market fundamentals, and the risks.
It is always advisable to gain trading experience using a demo account with virtual money until you are confident of making profits with the actual capital. Demo trading can also allow you to test your strategies, emotions, and suitability for actual Forex trading.