Online Forex Trading – FX Guide

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Trading forex in Kenya is the act of buying or selling currency on the foreign exchange market. During online forex trading, a currency’s exchange rate against other currencies and its fluctuations are considered. As a result, forex traders profit by purchasing currency at a lower exchange rate than it is worth and selling it higher.

In the past, only Banks, Governments, and large institutions took part in the foreign exchange market. However, due to the availability of low-cost trading platforms, retail traders and speculators have increased their participation in the forex market over the past 15 years.

According to the latest BIS statistics for 2019, the forex market is the largest financial market globally and trades approximately $6.6 trillion daily. The volume of retail and speculative investors in the global forex market is currently around 5.5%.

Kenya and Africa as a whole have also witnessed a rise in popularity in online forex trading. Beginners will find all the information they need in this article to learn how to trade on the forex market online.

What is Forex trading?

The purpose of forex trading is to earn profits from market fluctuations caused by the change in the value of currency pairs.

Take the Kenyan Shilling (KES) and the US Dollar (USD) as an example. One USD is equivalent to 100 KES. However, the KES doesn’t have the same strength as the USD. We must therefore pay 500,000 KES to buy 5000 USD.

If the value of the KES rises, we must pay 500,000 KES to buy 5000 USD. We would then have to pay less KES to buy USD. In other words, you would receive more KES for every USD you sell than you paid. The difference between what you paid and what you received is your profit.

The only way to be profitable at forex trading is to know when to invest in and study the currency pairs.

There are approximately 1.3 million forex traders in Africa, including about 70,000 Kenyans who regularly trade in the foreign exchange market.”

The Kenyan Capital Markets Authority, which governs online Forex trading, has been regulating the market since 2018. If you are a Kenyan FX trader, you should only deal with the CMA’s forex brokers to conduct business in Kenya. Trading with such brokers is safe with the CMA license

Trading with online brokers in Kenya

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You must ensure that any broker you use is well-regulated by a reputable finance authority/regulator before you choose to trade with them.

A governmental regulator holds forex brokers accountable because they are licensed. As a result, the forex broker complies with best practices to protect the trader’s funds.

If you deposit funds with an unregulated forex broker, they may use them without you knowing it. You may not be able to withdraw the funds that you deposited if this happens.

According to the CMA, forex traders in Kenya should only trade with forex brokers who the CMA regulates.

In Kenya, you can take legal action against a regulated broker who commits fraudulent practices. However, unregulated brokers are not subject to legal action.

CMA regulated brokers in Kenya

The CMA currently regulates only three forex brokers in Kenya. This list includes:

  • Pepperstone
  • Scope Markets
  • FXPesa

There are several types of accounts offered by the above brokers depending on the traders and the purposes.

Choosing the right type of account comes down to what financial instruments you plan to trade, the execution method you choose, the fees you’re willing to pay, and so on.

Investing less capital in certain accounts can result in a lower fee structure and lower fees.

While some foreign brokers are registered with CMA that cater to Kenyan clients with local deposit options like MPesa, CMA warns against these brokers since CMA is not overseeing them. This makes it difficult for investors to get redressed if these brokers do something wrong.

Kenyan traders should only trade with a broker regulated by the CMA or with top-tier brokers regulated by the CMA and at least two top-tier regulators like FCA, ASIC, and CySEC.

How to open an online forex trading account in Kenya?

Kenyan traders need to follow some fundamental steps before opening an account with a regulated forex broker:

Comparing different forex brokers – When choosing a broker, there are several factors to consider.

It is highly important to consider the regulation, deposit methods, financial instruments available, trading tools, types of accounts offered, and fees that are charged before picking a broker. Investors need to thoroughly research forex brokers and choose those that suit their needs.

Opening an account – After you have selected a forex broker you wish to trade, an account needs to be opened with that broker.

Trading accounts can be opened in a variety of ways. One can open ECN accounts, Standard accounts, or Micro accounts, for example.

While the steps for opening an account may vary from broker to broker, the general process remains the same.

KYC – A set of Know-Your-Customer (KYC) requirements must be completed after opening an account. Trader verification and other requirements must be completed.

Funds Required for Trading – Before a trader can start trading on a Live account, almost all forex brokers will require a minimum deposit.

Starting small and increasing your deposit as you gain experience is a good strategy for beginners.

Trading Platforms – Different forex brokers offer a variety of platforms for trading.

Many forex brokers offer platforms for desktops only, while others have platforms for tablets, mobiles, and desktops. Thus, you can start trading as soon as you have downloaded and installed the trading platform on your device.

It is recommended that new traders first start with a demo account & make demo trades only – until they are comfortable with the trading platform and have experimented with their trading strategy. You should only deposit real money once you have sufficient experience trading for a profit in the demo account.

How much do you need to start trading forex online?

When it comes to opening an account with a broker, many offer various options. However, almost all of these accounts come with a minimum balance requirement.

You generally suggest that you open a trading account with a minimum of $500 (Hotforex, FXPesa Kenya & XM Trading). Still, it is possible to do so with a minimum of $5 with many brokers. This will allow for a good profit on positive market movements and a sizable position to be taken in trading.

As with all investments, the position would be determined by the balance maintained and the leverage provided by the broker. An average day trader should not risk more than 1% of their forex account on a single trade. Thus, with a $500 account, the maximum risk per trade should be $5.

The size of the lot in which one decides to trade also affects the position one takes. A standard lot is 100000 units, a mini lot is 10,000 units, and a micro lot is 1000 units. The value of a pip per lot is fixed if USD is paired second in the currency pair, such as EUR/USD or AUD/USD, and your account is being funded in USD.

Accordingly, the price of one pip is $0.1, $1, and $10 for a Micro lot, Mini lot, and Standard lot. Knowing this information can determine the level of risk they can take and their position in a trade.

It would help if you started with a moderate amount of capital like $500 to get the flexibility you need since trading with low capital and high leverage can be very risky. Forex pairs with a high degree of liquidity tend to have changed within the range of 100 pips.

Thus, if you invest wisely with low leverage, you can generate a good return. You should, however, consider your risk appetite as well.

How to manage risks in Online forex trading?

Inherently, forex trading entails high risk. Accordingly, trading forex involves risks that traders need to be aware of.

To manage risk effectively, you must implement effective techniques. By implementing risk management techniques, traders can significantly reduce their risk and minimise or avoid potential losses.

Forex trading risks

High leverage

A large amount of leverage is generally offered by forex brokers. Trading with this much money allows traders to make much more than they have invested. However, the possibility of making higher profits means that traders also have a chance of losing much more than they have invested.

High volatility

A high frequency of currency exchange rate changes is common. As a result, traders lose more money more quickly since the forex market has the highest volatility of all financial markets.

Risk management tools

One should check the risk management tools that a forex broker offers before they start trading. Among the risk management tools that your broker may offer include:

Safe custom leverage

Brokers generally allow traders to adjust their leverage ratio for a trade. For example, in Kenya, most brokers offer a leverage of 1:400, but you can pick the leverage you want per trade. You can thus control the risk. In general, you should limit your leverage to 1:10 or less.

Stop-loss orders

When buying or selling, stop-loss orders can also be set. If the exchange rate moves unfavourably and this unfavourable movement crosses a certain threshold, the trade will be closed automatically.

You can therefore specify the maximum loss you are willing to accept on each trade. When entering into a trade, traders should always set stop-loss orders.

Guaranteed stop losses

You cannot lose more than your preset stop-loss order under any circumstance with a guaranteed stop-loss order.

When a currency’s value increases or decreases rapidly, slippage can occur. Therefore, it is possible that your stop-loss price will not match the price at which you exit the trade. However, during times of extreme market volatility, a guaranteed stop-loss prevents slippage.

Negative balance protection

Traders can’t lose more money than they deposited when they are protected from negative balances. But, depending on the broker, this might mean something different.

If a trader wants to know what kind of protection they will receive from negative balances, they need to read the fine print of their broker and speak with them about this.

Deal cancellation

A trade can be cancelled within a set amount of time after the trade has been entered. When an investor’s broker offers deal cancellation before the trade is entered, the trader can use it. However, this feature is rarely available.

Is online forex trading legal in Kenya?

forex legal

The Kenyan government regulates forex brokers by the Capital Markets Authority, based in Kenya, and oversees brokers who work from this country. Many brokers worldwide offer their services and solutions to Kenyan traders as they are regulated and authorised.

Common mistakes to avoid

New forex traders need to avoid certain common mistakes. Traders should avoid using high leverage, especially new ones because the losses can be much greater.

In addition, traders should never risk more than what they can afford to lose. For example, it is inherently risky to invest in or trade the forex market, and these markets are highly unpredictable. In other words, traders should be prepared to lose their entire investment.

Traders should never use unregulated brokers. Trades with them are risky, and a trader could lose all the money that has been deposited into their trading accounts. A trader could also be negatively affected by unregulated brokers’ fraudulent practices.

Trading advice should never be taken blindly by traders. Before investing their money, traders should conduct their research.

In general, it is recommended to use at least 1:10 leverage with a 1:2 risk to reward ratio. The importance of learning about the basic concepts of forex trading cannot be overstated. Traders should practise their trading strategies using demo accounts before trading with actual money.

Bottom line

Despite the best circumstances, foreign exchange is a risky market since many factors affect the currency price movements. Moreover, unlike any other financial instrument available to investors, currency-based instruments such as forex derivatives and CFDs are more volatile and unpredictable.

In the Forex market, value investors and long-term investors are not the target market, and day traders and speculators are best suited since you must be knowledgeable about a large number of economic and technical factors.

Beginners are at even greater risk due to the complex nature of the market, and one must usually have years of experience before they can comprehend the analysis and tools required to track movements.

It is rare for even experienced traders to accurately predict currency movements. Therefore, the best way to begin investing in the financial markets if you are new to them is to invest in stocks, bonds, and mutual funds. In comparison to forex, there is less risk in these financial markets.

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