What is Forex? – FX Guide
One of the main purposes of forex trading in Kenya is to earn financial profit by actively exchanging foreign currencies. In that case, the speculator can do so with the intent of profiting from a currency’s price movement. But, on the other hand, the hedger can protect their accounts in case of a negative move of the currency. Therefore, a beginner trader in Kenya usually asks what is Forex and how he can start trading at the forex market?
The trader in Kenya can refer to an individual on a retail platform, a bank trader on an institutional platform, or a hedger who manages their own risk or outsources it to a bank or money manager.
If you are also interested in trading forex, this article is for you! You will get a detailed explanation of the forex market and forex trading. All levels of traders in Kenya will find this article useful. The purpose of this article is to provide a solid foundation for those new to forex trading or those looking to enhance their existing knowledge.
What is forex trading?
The act of forex trading in Kenya involves the exchange of one currency for another. As each currency is quoted in terms of another, price quotations of currencies have the potential for trading.
The Euro can be traded against the US Dollar (EUR/USD), the British Pound (EUR/GBP), and the Japanese Yen (EUR/JPY), among other currencies, giving traders a wide range of Euro pairs to choose from.
Yet, the currency of Kenya is Kenyan Shilling, but most brokers do not accept this currency. The Kenyans usually have to convert KES into other major currencies
Understanding Forex market
In the foreign exchange market in Kenya, or forex (FX), selling and buying currencies takes place without a central clearinghouse. Instead, it is conducted over the counter (OTC) rather than on a centralised exchange.
Whenever you buy imported products like clothing or shoes, or when on vacation, you buy foreign currency, you are likely already participating in the foreign exchange market in Kenya without being aware of it. There are several reasons why forex traders may be attracted to it, including:
- Forex market size
- Trading in a wide range of currencies
- Volatility at different levels
- Cost-effective transactions
- Trading 24 hours a day, 7 days a week
- Forex trading: two sides to every market
There is a unique element of the forex market in Kenya in how prices are quoted. This is because currency quotes can only be made by using other currencies since currencies are the basis of the financial system.
When using this two-sided convention, one can create a relative valuation metric that may sound confusing at first, but that becomes more normal as one works with it.
By trading in pairs in Kenya, forex traders can express their trade against the currency they feel is most appropriate for their situation, thus providing additional flexibility.
For instance, let’s assume that a trader in Kenya expects the European economy to grow more rapidly than expected, and therefore would like to go long the currency. In the meantime, let’s say this investor is bullish on the US economy but bearish on the UK economy.
As you can see from this example, the investor is not forced to purchase Euro against the US dollar (which would be a long EUR/USD trade); rather, they can purchase Euro against the British Pound (going long EUR/GBP).
By using this strategy, investors and traders in Kenya are given extra flexibility, allowing them to avoid shorting the US Dollar to buy the Euro and, instead, shorting the British Pound to buy the Euro.
Forex trading: base vs counter currencies
The convention of a forex quote in Kenya is an important distinction: the first currency listed is known as the ‘base currency of the pair, and this asset is quoted. In a pair, the second currency is called the ‘counter currency, which is the currency at the other end of the quote or the currency used to determine the value of the first currency.
Let’s take EUR/USD as an example…
The Euro is the base currency in the EUR/USD currency pair, as it is the first currency in the quote.
EUR/USD is a quote that uses the US Dollar as the second currency and as the basis for defining the Euro’s value.
Consider a EUR/USD quote of 1.3000. As a result, the Euro would be worth $1.30. Assuming that the price rises to $1.35, the Euro will be worth more and, on a relative basis, the US Dollar will be worthless.
Specifically, if an investor in Kenya is bearish on Euros but bullish on the US Dollar, they can choose to short the pair, expecting price falls. They can cover the trade by buying it back at a lower price, pocketing the difference.
Forex trading: the forex market explained
To put it simply, the foreign exchange works like many other markets by using supply and demand to influence the price. So, for example, if Europeans holding euros feel there is a strong demand for the US dollar, they will convert those Euros into dollars.
The US Dollar will increase in value, while the Euro will lose its value. However, it is important to be aware that this transaction affects only the EUR/USD currency pair, and the USD will not depreciate against the Japanese Yen, for example.
Forex trading: what drives the flows?
FX market movements in Kenya can be influenced by numerous factors, as the example above illustrates. In addition, there are also macroeconomic factors such as the election of a new president or country-specific factors such as the national interest rate, GDP, unemployment, inflation, or debt-to-GDP ratio.
Top traders use an economic calendar to stay abreast of these other important economic releases that might move the market.
The longer-term impact of interest rates from relevant economies on Forex prices in Kenya is also important, as they can directly impact whether you should hold a currency long or short.
Forex market is highly volatile
One of the most volatile markets in the world is the currency market or forex market in Kenya. Exchanging currencies is a complex process, and it can be challenging to keep track of them.
The volume of trades in which the exchange rate fluctuates is responsible for the movements. Nevertheless, a large trading volume does not always correspond to a volatile exchange rate if the trades balance each other out.
As a result of the high volatility of the forex market in Kenya, you may lose a substantial amount of money very quickly if you enter into a bad trade. On the other hand, the high volatility of this market can also lead to significant profits, but traders need to be careful when they are making trades in it.
In the forex market, traders must keep a close eye on their trades due to the high volatility. Traders in Kenya must keep an eye on the foreign exchange markets whenever possible since they are open 24 hours a day, 7 days a week.
What explains the popularity of Forex?
Traders, big institutions, governments, and individuals in Kenya all use the foreign exchange market to change one currency for another. The interbank market, or liquidity market, is where liquidity providers engage in trading with each other.
Foreign exchange trading between global banks and liquidity providers has the advantage of allowing currency transfers around the clock (during the week).
Toward the end of the Asian session, the European and UK banks go live before transferring to the US. As a result, trading for the entire day concludes at the start of the Asian session following the US session.
A big part of what makes this market in Kenya so attractive is the availability of liquidity around the clock. It is, therefore, extremely easy for traders to enter and exit foreign exchange positions since there is a large number of willing buyers and sellers.
Forex trading: how does it work?
Similar to other markets, you can buy a currency if you believe its value will increase. The term “going long” refers to this. Conversely, it is prudent to sell the currency if you believe it is going to depreciate. The practice is known as going short.
Forex trading: who are the major players?
A foreign exchange market in Kenya consists mainly of two types of traders: hedgers and speculators.
A hedger always looks to avoid large fluctuations in the exchange rate. So imagine how big companies like Exxon are seeking to minimise their exposure to foreign currency movements.
In contrast, speculators are risk-averse and are always looking for opportunities to take advantage of fluctuations in exchange rates in Kenya. Retail traders and large trading desks at the big banks fall into this category.
Reading a forex quote
For all traders, it is imperative to know how to read a quote since it will determine when you should enter or exit a trade.
For most FX markets in Kenya, prices are quoted up to five decimal places, but the first four factors are most significant. The number denotes each unit of the counter currency to the left of the decimal point.
In this case, the Dollar is represented by $1. Next, two digits represent the cents, so 13 US cents in this case. Usually, the third and fourth digits are referred to as pips, representing fractions of a cent.
You should be aware that the 4-digit number is called a ‘pip.’ A 100 pips decline in the EUR against the USD will result in the new sell price is 1.12528 because the price of 1 Euro in USD will decrease.
Using the above-quoted bid price as an example, One Euro is worth One Dollar, 13 cents, 52 pips, and 8/10ths of a pip in US Dollars.
Forex trading on demo accounts: gaining experience without risking hard capital
There are several risks associated with learning a market or learning to trade. The biggest one is that trading can be costly, and traders should be aware of the risk of loss when trading actual capital.
For a new trader who’s just getting started, the cost of learning about Forex can be expensive, particularly when buying or selling a Forex pair.
Almost all forex brokers in Kenya offer demo accounts to help new traders and prospective customers become familiar with the market, the platform, and the dynamics of foreign exchange trading before depositing a single dollar, Euro, or Pound.
A demo account can provide new traders with a simulated environment to practice their trading strategies while managing fictitious capital. In addition, forex trading can be an excellent way to learn about the market dynamics – how to trigger trades, set stops, and scale-out.
Forex trading: why trade forex?
There are many advantages to trading forex over other markets, as outlined below
- Low transaction costs: Forex brokers in Kenya generally earn money on spreads, as long as they open and close the trade before overnight funding charges are charged. Therefore, forex trading costs are lower than that of a market like equities, where commissions are charged.
- Low spreads: Major FX pairs have very small bid-ask spreads due to their liquidity. The spread is the first hurdle to be overcome when the market moves in your favour when you trade. The additional pip you earn when the market moves in your favour is pure profit.
- More opportunities to profit: In forex trading, traders can take a speculative position on currencies that appreciate (appreciating) or depreciate (depreciating). Traders can spot profitable trades among many different forex pairs as well.
- Leverage trading: Leverage is a part of forex trading in Kenya. In other words, a trader does not need to pay the entire trade cost but only a fraction of it. However, while this can enhance profits, it can also exacerbate losses. Therefore, it is recommendable that you limit your leverage to 10 to one or less when it comes to risk management.
Now you have understood what Forex is, and you can start trading. Getting familiar with the market dynamics would be a good starting point. A demo account can let new traders take on positions and manage their exposure with fictitious dollars in a simulated environment. Demo accounts can provide prospective forex traders with a safe environment to trade without the risk of financial loss. The forex market serves as an ideal training ground for new traders to understand the market dynamics while building their strategies and assessing their approach.
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Heinrich is a forex and CFD enthusiast with a passion for writing good informative quality content. He strives to showcase the best forex brokers in Africa. Join him on his Journey!
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