What is Forex Trading? – FX Guide

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Recently, Kenya has started involved in forex trading like many other African countries. Many young Kenyan traders are interested in starting a trading business but don’t know where to start. One of the most common questions you may hear from the youth of Kenya is, “what is Forex trading?”

You don’t need to worry as we’re going to tell you everything you need to know about FX trading in Kenya in this guide. You will hopefully learn the nitty-gritty of forex trading by the end of this guide.

Kenya’s Capital Markets Authority (CMA) regulates and legalises online Forex trading. Approximately 90,000 FX traders are estimated to exist in Kenya at the moment, and this number is growing.

Vodafone and Safaricom’s 2007 introduction of M-Pesa, a mobile-based microfinance service, allows the unbanked even greater access to the financial system. In 2010, it became Kenya’s most profitable mobile banking service.

Kenyans are increasingly using their mobile phones to trade Forex. In addition, millions of Kenyans who previously were unbanked have gained formal financial access thanks to the successful launch of M-Pesa.

The Central Bank of Kenya and the Capital Markets Authority (CMA) are prepared to ensure a trustworthy environment despite financial pyramid schemes and other scams being prevalent in Kenya, as they are in most frontier markets. Let’s discuss all other facts about FX trading in Kenya, which are necessary for novice Kenyan traders.

Overview

In forex trading, different currency pairs are traded to profit from the difference in value between the currency pairs resulting from market movements.

For example, let us consider Kenya Shillings (KES) and US Dollar (USD) currency pair (USD/KES). A USD is worth 100 KES. KES is a weak currency in comparison with the USD. We must therefore spend 500,000 KES to purchase 5000 USD. Let’s assume the KES value increases on the market.

If so, we will have to pay less KES for every USD we purchase. That would also mean that you would receive a higher amount of KES for every USD you sell. Your profit is the difference between what you have paid and what you received.

It is only profitable to trade Forex in Kenya when studying the currency pairs and investing in the right currency pair.

How to open a Forex trading account in Kenya?

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First of all, you must choose a regulated broker and open an account with him. In Kenya, FX trading has now become more regulated by the Capital Markets Authority (CMA).

Forex trading in Kenya requires an account with a broker licensed by CMA. The broker must be regulated and supervised locally. CMA has regulated four brokers in Kenya: EGM Securities, PepperStone Kenya, ForexTime (Exinity Group), and Scope Markets.

Global FX brokers doing business in Kenya are also regulated by foreign authorities, such as Financial Authority (FCA), Financial Sector Conduct Authority (FSCA), Australian Securities and Investments Commission (ASIC), and others.

The deposit requirement for opening a Live Trading account and trading with most brokers is as low as $1.

Start with a Demo Forex Trading Account

Almost all brokers in Kenya provide demo accounts. With a demo account, you can trade, understand the nuances of trading, and understand the risks involved without putting your actual money at risk. In addition, you can use the dummy funds in your demo account to test your strategies under actual market conditions and learn.

Note: Demo account platforms will likely not offer the same market and trading conditions as Live accounts in Kenya. However, they can still be useful for learning trading techniques.

After gaining enough experience in the emo, being profitable consistently for a few months, you can then move on to a real account.

Opening a live trading account

Live account opening is available on the websites of most Forex brokers.

Opening a Forex trading account in Kenya

The steps involved in both cases are essentially the same. First, it is necessary to fill out your account information, the Financial Adequacy information.

To complete the verification, you must submit your two KYC documents, proof of identification, and address.

Live accounts may be provided by either market makers or DMA (Direct Market Access) brokers; DMA brokers can be ECN or STP brokers in Kenya. ECNs (Electronic Communication Network brokers) allow investors to directly trade on the Forex Markets with other investors. The fee is based on how much customers trade in the ECN environment.

Known as Straight Through Processing, STP is where brokers pass orders to liquidity providers for execution. This accesses interbank markets. Although having DMA gives you a wide range of markets with higher rewards and risks, finding brokers that provide DMA can be very difficult.

If you are a beginner, it is best to select standard spreads only, preferably with a broker that offers STP accounts. If you are an experienced trader, an ECN account is best. ECN accounts have low fees, but commissions are based upon the number of lots traded.

How much do you need to start trading Forex in Kenya?

hand put money coin into piggy for saving money wealth

Brokers generally offer a wide variety of options for the opening of an account. However, each account requires a minimum balance to open.

In general, the minimum deposit amount offered by many brokers is $10. Still, we recommend that you open a brokerage account with a minimum of $500. Taking a large position and profiting from positive market movements would be possible if this was done.

Nevertheless, one must consider that a position depends on the broker’s leverage and the balance maintained. Therefore, it is generally recommended that a day trader should not risk more than 1% of their forex account on one trade. For example, a trader should only risk $5 if their account contains $500.

The lot size is also an important factor when it comes to trading positions in Kenya. The standard lot size is 100,000 units; the mini lot size is 10,000 units, or the micro lot size is 1000 units.

In cases where USD is listed second in the currency pair, such as EUR/USD or AUD/USD, and your account has been funded in USD, you receive a fixed pip per lot. In other words, a Micro lot, a Mini lot, or a Standard lot respectively have a pip value of $0.1, $1, and $10.

This information is very useful as it would provide insight into the risk one may take and what positions to take in the trades.

Example

Imagine that we have $500 on your account to trade on mini lots of EUR/USD, currently at 1.084. EUR/USD traders can leverage 100:1 and receive a spread of 0.4 pips through this broker. One Mini lot of EUR/USD can be purchased for $108.4 per unit (10000 units*$1.0084 = $10840/100 leverage = $108.40).

With $500 in the account, we could buy 40000 units of EUR/USD, or 4 Mini lots, resulting in a total investment of $433.6. A 1 pip move in EUR/USD would result in a $1 profit per lot. Our position would thus have a total gain of $4.

Therefore, we reduce the broker’s spread to 0.4 pips per lot to reach a profit of $2.4 on 40,000 units, using a margin of 0.4 pips per lot.

It is very risky to trade with minimal capital & high leverage. You can start with a moderate amount of capital, like $500, which will give you flexibility when trading. It is typical for the very liquid forex pair to change by 100 pips or more. Investing wisely and using low leverage allows you to generate a good return. Your risk appetite, however, also needs to be considered.

How can you deposit & withdraw for forex trading in Kenya?

Traders can fund their trading accounts in Kenya Shilling through regulated forex brokers such as FXPesa, Scope Markets Kenya, PepperStone Kenya. Deposits can be made by bank transfers to a Kenyan bank account. It can usually take up to 24 hours for your trading account to be credited using this method.

Additionally, you can fund your account with credit and debit cards & mobile money like MPesa, Airtel money, etc. In general, both of these methods provide instant funding, and withdrawals are processed within a few hours.

In the case of eWallets & mobile money withdrawals, FXPesa, a CMA Regulated FX broker, typically takes a few hours to process. However, withdrawals to your bank account usually take a few days.

Kenyan forex regulation

The Kenyan forex market is primarily regulated by the Capital Markets Authority (CMA). However, the Central Bank of Kenya can enact regulations for the CMA to implement.

The CMA tightened its regulation by requiring all foreign brokers to obtain licenses, confirm minimum capital requirements, and submit quarterly and annual reports. As a result, Kenya’s forex trading market has expanded rapidly in recent years.

The Kenyan CMA has regulated Forex brokers since 1989. Foreign Exchange Dealing Brokers, Foreign Exchange Non-Dealing Brokers, and Foreign Exchange Money Managers can apply for licenses from the organisation. African Capital Markets Authority named Africa’s Most Innovative Regulator for 2019.

Security

Because anyone can now trade online with a computer, security has become their primary concern.

Due to increased openness on the forex market, you want to make sure your trades go smoothly, so you don’t have to worry about anything. Therefore, security is the top concern for every trader.

Therefore, you should visit the broker’s website before opening an account. Avoid opening an account with a broker if you see anything shady.

Forex trading – a beginners guide

The process of trading currencies is complex and can be risky. Foreign exchange instruments are not standardised, and interbank markets are regulated to varying degrees. The forex market is almost entirely unregulated in some parts of the world, but that’s not the case with Kenya.

There are interbank markets around the world in which banks trade with one another. Sovereign risk and credit risk are determined and accepted by banks themselves, and they have established internal processes to protect themselves. The purpose of industry-imposed regulations such as this is to protect each participating bank.

Traders with small accounts usually trade with unregulated, semi-small brokers, who re-quote prices and even trade against their clients. Government and industry regulation may apply in some locales, but those safeguards are inconsistent throughout the world.

For retail investors, it would be wise to investigate whether a forex dealer is regulated in the US or the UK (US and UK dealers have more oversight) or the CMA of Kenya with relatively lax rules. In addition, if a dealer becomes insolvent or a market crisis occurs, it is important to determine what account protections are available.

Start trading Forex: a step-by-step guide

The process of trading forex is similar to that of investing in stocks. To begin, here is a step-by-step guide.

Educate yourself

Forex trading requires specialised knowledge, even though it is not complicated. For example, compared to equity markets, forex traders have a higher leverage ratio, and the factors that drive currency price movement are different. Learn all the ins and outs of fx trading with one of the numerous online courses available for beginners.

Set up a brokerage account

To get started with FX trading, you will need an account at a brokerage firm. Most of the Kenyan brokers do not charge commissions. Instead, profits are made from spreads (also called pips) between the buy and sell prices.

It is a good idea to open a micro account for beginners with a low capital requirement. These accounts allow brokers to limit their trades to as little as 1,000 units of a currency and contain variable trading limits.

An account lot is equal to 100,000 currency units. Therefore, you can determine your trading style with a micro account and become more comfortable with forex trading.

Develop a trading strategy

A trading strategy will help you set broad guidelines and a roadmap for trading, even when it is impossible to predict and time market movement. Based on your financial situation and situational reality, you must develop a good trading strategy.

By calculating it, you consider how much money you are willing to invest for trading and how much risk you can tolerate without losing your investment. For most foreign exchange traders in Kenya, leverage is of critical importance. But for those willing to take the risk, the rewards are also greater.

Keep an eye on your numbers

At the end of every trading day, always check your positions. You can usually find this information in your trading software. Also, make sure you have enough money in your account to make future trades and that you do not have any pending positions to fill out.

Keeping your emotions in check

Beginners face emotional roller coasters and unanswered questions when it comes to forex trading.

Would it have made more sense to hold onto your position a while longer? Why didn’t you notice that the low gross domestic product number caused your portfolio’s value to decrease?

Such unanswered questions can lead to confusion if you obsess over them. To maintain emotional equilibrium across profits and losses, you mustn’t get carried away by your trading positions. Always close positions when necessary to keep emotional equilibrium.

Forex terminology

Terminology complex like a puzzle - pictured as word Terminology on a puzzle pieces to show that Terminology can be difficult and needs cooperating pieces that fit together, 3d illustration

Learn the language of the platform before starting your trading journey. Among the terms you should become familiar with are:

Forex account

Using a forex account, you can trade currencies. Three types of forex accounts are available depending on lot size:

Micro accounts

You may trade up to $1,000 worth of currencies in one lot if you have an account like this.

Mini accounts

You can trade up to $10,000 worth of currencies in one lot through these accounts.

Standard accounts

A trading account that allows you to trade up to $100,000 worth of currencies in one transaction.

Remember that margin money used for leverage is included in the trading limit for each lot. Brokers can therefore provide you with capital according to a predetermined ratio. For example, to trade $1 worth of currency, they might put up $100, so you would only need to spend $10 of your funds.

Ask

At an asking price, one is willing to purchase currency at the lowest possible price. Using the $1.3891 figure as an example indicates the lowest price you are prepared to pay for a pound in USD. As a result, ask prices are normally higher than bid prices.

Bid

When you place a bid, you are willing to give a certain price for a currency. The market maker responds to buyer queries by continuously putting out bids in a given currency. Bid prices are typically lower than ask prices; however, bids may be higher when demand is high.

Bear market

In a bear market, all currencies’ prices decline. The bear market represents a market decline caused by depressed economic fundamentals or natural catastrophes, such as financial crises or natural disasters.

Bull market

All currencies increase in price during a bull market. This is because an uptrend signifies that the global economy is doing well, and bull markets reflect that.

Hence, before you begin the actual trading process, you need to become familiar with the terminology associated with FX trading.

In addition to the overlapping terms common to finance, including leverage, bid/ask prices, and accounts, some terms are specific to currency trading.

Contract for differences (CFDs)

With a contract for difference (CFD), traders can speculate on currency price movements without actual ownership of the underlying asset.

When you bet on whether the price of a currency pair will rise or fall, you will buy CFDs relating to that currency pair, and when you believe it will decline, you will sell CFDs relating to that currency pair. As a result, leverage in foreign exchange trading can lead to heavy losses if a CFD trade goes wrong.

Leverage

Leverage is the process of multiplying returns by borrowing capital. Leverage is common in the trade market, and traders often use it to increase their positions.

An investor might bet against the euro (EUR) in a trade against the Japanese yen (JPY) with just $1,000 of their capital and $9,000 borrowed from their broker. Due to the relatively small amount of capital they have used, if the trade goes in the right direction, the trader stands to make significant profits.

The downside to a high-leverage environment is the enhanced downside risk, which can result in significant losses. According to the example above, if the trade goes the other way, the trader’s losses will multiply.

Lot size

Lots are the standard sizes in which currencies are traded. Standard, mini, and micro-lots are the most common sizes. A standard lot size is 100,000 units. Normally, micro lots consist of 1,000 units of the currency, while mini lots consist of 10,000 units.

Traders can also trade nano lots of currencies, which are worth 100 units of that currency. Lot size plays an important role in the overall profitability of a trade. Profits (or losses) are higher with a larger lot size and vice versa.

Margin

The margin is the amount of money set aside in an account for trading currencies. By putting up margin money, the broker can be assured that the trader will meet his monetary obligations even if the trade does not go his way.

Based on a trader’s and a customer’s balance over some time, the margin is calculated. Kenyan traders use margin along with leverage (defined above).

Pip

A pip is an “interest in point” or “percentage in point” made in currency markets and represents a four decimal point price move. Each pip equals 0.00001. The value of one pip equals one cent, and the value of 10,000 pips equals one dollar. A broker’s standard lot size can influence the pip value. Each pip in a standard lot of $100,000 is worth $10. Due to the leverage available in currency markets, even small price changes, measured in pips, can impact trade.

Spread

Spreads measure the difference between the bid (sell) and ask (buy) price. Kenyan traders earn money by charging spreads instead of commissions. A wide variety of factors determine the size of the spread. Your trade size, the demand for the currency, and its volatility can all affect your profits and losses.

Snipping and hunting

Using sniping and hunting to maximise profits, currencies are purchased and sold near predetermined points. It is only possible to catch brokers engaging in this practise by networking with other traders and observing their behaviour patterns.

Forex trading strategies

In Kenya, there are two basic types of forex trades: long trades and short trades. An investor who trades long-term bets that the currency’s price will increase in the future.

In short trades, the investor bets the price of the currency pair will decrease in the future. To fine-tune their approach to trading, Kenyan traders can also rely on technical analysis strategies like breakouts and moving averages.

There are four types of trading strategies depending on the duration and number of trades:

Scalping

Scalping involves holding positions for no longer than a few minutes while the number of pips per trade controls the profit.

The purpose of making such trades is to capitalise on small profits on each trade so that at the end of a day or period, the total profits made add up to a tidy sum.

Price swings are predictable, so they cannot handle too much volatility. As a result, the most liquid pairs and busiest trading times of the day are usually preferred by traders when making such trades.

Day trading

Investing in day trades means holding and liquidating positions on the same day. It can take hours or minutes to complete a day trade. Day traders need to be knowledgeable about important technical indicators and have skills in technical analysis. For day trading, incremental gains are important throughout the day, just as they are for scalp trading.

Swing trading

Unlike day traders, swing trades are held for a longer period; for instance, the trader might hold the position for several days. Thus, the use of swing trades is useful during economic turmoil or major announcements from governments.

Swing traders don’t require constant market monitoring throughout the day since they have a longer timeline. The ability to consider economic and political developments can also assist swing traders in gauging currency movements.

Position trading

A position trade typically lasts for months or years, and the trader holds the currency. Trades of this nature require more analytical skills since they are based on reasoned reasoning.

Usage of charts in Forex trading

In FX trading, there are three types of charts. The Kenyans usually use the following charts to make profitable trades

Line charts

A currency’s big-picture trends can be determined by using line charts. Line charts are the most commonly used chart type in forex trading. Users can specify the periods during which they would like to see the closing price for the currency.

Trading strategies can be devised by analysing trend lines inline charts. For instance, you can use a trend line to determine whether prices are rising or falling.

Although a line chart can be useful, it is generally used as a launching point for further analysis.

Bar charts

In addition to their other uses, bar charts are often employed to represent specific periods in trading. Line charts do not provide this information. Instead, OHLC (Opening, Highest, Lowest, Closing) is the opening, highest, and lowest prices (OHLC) for a particular trade in each bar chart.

A dash in the left column indicates the day’s opening price, and a similar dash in the right column indicates the closing price. Green or white may indicate an upward trend in price, while red or black indicates a downward trend.

Trading bars help traders determine whether the market is a buyer’s or seller’s market.

Candlestick charts

Japanese rice traders used candlestick charts for the first time in the 18th century. Their visual appeal and readability are superior to those of the other types of charts described above. As a currency begins trading, the highest price point is shown at the top of the candle, and the lowest price point is displayed at the bottom of the candle.

Up candles are shaded green or white and represent increasing prices, while down candles indicate declining prices. Candlestick charts can reveal a market’s direction and movement based on its formations and shapes. In candlestick charts, hanging man and shooting star are among the more common formations.

What is the best time to trade in Kenya?

There is a good overlap between 11 am and 5 pm during the London and New York sessions, the best time to trade in Kenya.

The best time to trade in Kenya is between 11 am and 5 pm when the active London and New York sessions overlap. Volatility will be at its highest during these hours.

Trading at night may not be that expensive for most traders, though it will be expensive if you are a night owl.

The best time to trade Forex in Kenya is during the following four sessions:

  • 11 pm – Sydney session
  • 3 am – Tokyo session
  • 11 am – London session
  • 3 pm – New York session

The most liquid and volatile sessions can be taken advantage of if you wake up when Tokyo and London or London and New York overlap.

Is Forex trading legal in Kenya?

The Capital Markets Authority (CMA) is Kenya’s financial regulator and oversees FX trading. Founded in 1989, it oversees all aspects of the country’s financial markets. Kenya’s capital market is controlled and strengthened by the CMA so that domestic investors can feel secure investing in Kenya.

In Kenya, it is a law that all brokers providing services must be regulated by the CMA to protect investors from fraudulent schemes and misconduct.

Kenya’s online market was strictly monitored by the CMA as of 2017, under tighter regulations. Registration for capital markets (online foreign exchange trading) is required under the Capital Markets (Online Foreign Exchange Trading) Regulation 2017.

Kenyan citizens must trade with brokers registered with the CMA and located in Kenya to trade in a secure environment.

Risks of Forex trading

It is risky to trade Forex and can result in losses as high as your original investment. Taking preventive action to minimise risks starts with understanding the risks. Have a look at the risks you may face while trading in Kenya

FX market can be highly volatile

In Forex, you’ll find exchange rates and currency pairs. Foreign exchange markets are highly volatile. According to the global financial markets, various economic, geopolitical, social, etc., factors may influence the exchange rate fluctuations. So a currency pair that you can profit from today may lose money tomorrow.

Therefore, to mitigate volatility risk, one must carefully monitor the exchange rates and currency movements.

Poor risk management

Hedging instruments such as derivatives in Financial exchange trading should be used to reduce the risk of sustaining large losses. The use of high leverage refers to trading with borrowed capital. Thus, if leverage is high, then the investor is forced to pay for both losses.

Trading with an unregulated broker

Especially in countries like Kenya, unregulated brokers pose a high risk. Using a regulated broker guarantees that your money will be used exclusively for your trading. Unregulated brokers can misappropriate investor money and may mislead inventors by promoting fraudulent schemes.

By using a regulated broker, one can protect their investment and avoid fraudulent activity.

Unpredictable markets

Investing in securities requires calculating risk-reward ratios since the markets are volatile. Therefore, investors should know their maximum loss and how much money they will gain from their investment.

It is always better to have a smaller loss than a larger profit. Therefore, a stop-loss order with a minimum loss protection level should be in place.

Before investing, one of the best ways to reduce these risks is to understand the FX market fully.

Tips to avoid risks

People Holding Tips

  • Be aware of any economic news that might affect the value of the currency. Many economic factors affect the market and the value of currencies.
  • Don’t risk more than 10% of your capital on any single trade. Make certain you have proper money management.
  • Trading forex and CFDs can be risky, so they should be studied carefully before starting.
  • Leverage should never exceed 1:10 when trading Forex & CFD instruments.
  • Stick to your Stop Loss.
  • Be aware of any economic news that might affect the value of the currency. Many economic factors affect the market and the value of currencies.
  • Don’t risk more than 10% of your capital on any single trade. Make certain you have proper money management.
  • Trading forex and CFDs can be risky, so they should be studied carefully before starting.
  • Leverage should never exceed 1:10 when trading Forex & CFD instruments.
  • Stick to your Stop Loss.

Pros and Cons of Trading Forex

Pros and Cons - Balance Concept

Pros

Forex trading has the following pros:

  • The FX platform is Kenya’s largest daily trading market in terms of volume and offers the most liquidity. It is thus very easy to trade any major currencies with a small spread for a fraction of a second in most market circumstances.
  • In Kenya, you can trade at the platform 24/5. Traders can profit or cover losses on a wide time horizon thanks to the broad coverage.
  • Leverage, or the possibility of multiplying your profit from a small starting capital, is a common feature in trading.
  • Trading strategies can be executed quickly when FX markets are automated.
  • Traditional stock and bond markets are more centralised than the forex market. Because there are no centralised exchanges that dominate currency exchange operations, there is less chance of manipulation through insider information about a company or stock.
  • Kenyan FX traders follow the same rules as regular traders and require substantially less capital than Kenyan stock traders; therefore, they can trade Forex more easily than stocks.

Cons

Forex trading has the following cons:

  • FX traders are much more volatile than regular markets, even though they are the most liquid markets.
  • In the FX markets, banks, brokers, and dealers offer traders a high level of leverage, which allows traders to control large positions with relatively little money. It is common for forex traders to leverage up to 100:1. A trader must understand leverage and the risks it introduces to a trading account. Many dealers have become insolvent unexpectedly due to excessive amounts of leverage.
  • Most brokers have no wide acceptance of Kenyan shillings (the currency of Kenya), which is a problem for traders.
  • Understanding economic fundamentals and indicators are crucial to effectively trading currencies. To understand how the fundamentals of the various economies influence the value of currencies, a currency trader needs to grasp the interconnections between these economies.
  • FX markets are decentralised, so they are not subject to the same regulation as other financial markets. Trading on the forex market is subject to varying levels and types of regulation depending on the jurisdiction.
  • A lack of regular income instruments such as dividends could make Kenyan forex markets attractive to investors who do not expect exponential returns.

Bottom line

Investing in foreign currencies, even for seasoned, educated investors and traders, can be very risky. However, as a beginner, it is very important to spend as much time as possible learning about the concepts of Forex, CFD trading, such as the risks, strategies, and so on.

When you are familiar with the basics, open a demo account with your favourite broker. Test your strategy on the demo account for a minimum of 3-6 months until you have one that works. Investing real money should only be done once you are comfortable. Begin with mini lots and low capital. Pay attention to the lessons on managing money.

Trading forex in small amounts is easier for traders, especially those with limited funds. However, long-term fundamental-based trading or a carry trade may be profitable for investors with a longer-term horizon and larger funds. In addition, the ability to understand macroeconomic fundamentals and use technical analysis to become more profitable could help new forex traders become more successful.

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