What is forex trading?
According to Rufas Kamau, a research and markets analyst at Scope Markets Kenya, a non-dealing forex broker that is licensed and regulated by the Capital Markets Authority (CMA) of Kenya, the forex market is a global decentralized marketplace for exchanging national currencies. “Forex trading involves taking advantage of currency value fluctuations to make money,” says Rufas. The market analyst explains that forex markets tend to be the largest and most liquid asset markets in the world due to the global reach of trade and commerce activities which occur with exchange from one currency to another as goods and services are paid for.
The level of risk
The level of risk when trading forex is extremely high. Multiple forex market studies indicate that over 95 per cent of forex traders lose their money. This is largely because forex trading deals with large volumes over small margins and high-frequency trades. Financial journalist Wallace Kantai says that in forex trading, you will be up against entities like multi-national investment banks. “These institutions have access to the best, latest and fastest information. They deploy algorithms and artificial intelligence to ensure that they can exploit even the most minuscule of advantages,” he says. Kantai gives the example of a Bloomberg terminal that costs an estimated Sh2.5 million annually. Even after accessing this terminal, you will need to be on your toes to digest and turn the flood of information it gives out into profit. “These institutions trade round the clock, such that by the time you wake up, they’ll have been absorbing information, incorporating it into their trade, and trading for hours,” says Kantai.
The amateur who wants to get rich quick
Most people are lured into forex under the guise of making quick money or becoming overnight millionaires. According to Rufas, this is not the reality. “Forex has risks and requires patience and strategy to grow a portfolio substantially,” he says. This rush for quick money has left thousands of investors nursing heavy losses. In 2014, investors lost over Sh1 billion in a forex scam that was masterminded by Alfred Wangai and his VIP Portal firm in Limuru. Police investigations revealed that VIP Portal received over Sh1.08 billion between October 2013 and September 2014. The deposits were from unsuspecting investors.
How it works
Big forex traders such as investment banks and pension funds use certain indicators (candlesticks, RSI, algorithms, and Bollinger bands) to trade effectively. Forex requires very efficient computer technology and extremely high internet speeds. Large traders shoot bids from small traders by betting against them such that when the small traders lose money, the large traders gain. Kantai says that although you can make some money from forex, maintaining a winning consistency will be impossible. “It is possible to make some money from forex. The chances of winning long term and becoming a forex millionaire are much lower,” he says. Investment advisor Erastus Amisi says that most amateur traders lose money while gorging on leverage. “This is one of the first mistakes new traders make. They want a pie of the multi-trillion daily market but do not know how to size themselves appropriately,” he says. According to Kantai, with leverage, you put some money down and trade only a multiple of the amount. He says that this only works when you’re gaining. “You’ll most likely lose your money when there is a margin call,” he says.
Minimum investment and training
This largely depends on the type of broker you choose. For example, at Scope, you can start trading with Sh10,000. There are brokers too that require a minimum deposit amount of $5 (Sh500), $300 (Sh30,000) or $1,000 (Sh100,000). Before you start trading, your broker may require you to open a dummy account you can use as a training tool.
Spotting a forex scam
The first step is to check the licence of the broker. This license is provided by the Capital Markets Authority (CMA) under the Online Foreign Exchange Trading Regulations, 2017. Rufas says that in Kenya, there are only four licensed non-dealing foreign exchange brokers. “The promise that you will always make money and become an overnight millionaire is not real,” he says. Whereas one can start building a forex portfolio from as low as Sh10,000, it may take time before your investment can make you a millionaire. “Any investment requires patience, risk management, and strategy to grow,” he says. To avoid getting scammed, Rufas says that you should only trade through brokers who are regulated by the CMA. This will give you a source of redress in the event of a scam.
These vary from one broker to the other. Most forex brokers promise new traders zero commission and regulatory charges. Some forex accounts will require you to pay commissions while others will not.
Is a forex class the best option?
There are many online training and physical tutorials on how to trade forex. However, Kantai recommends that if you are good with investments and finances, you should apply to join the treasury department of a mid-sized company, a hedge fund, or an investment bank. “This will give you real-time experience on how the money market and forex works,” he says. “That way by the time you switch to trading forex individually, your chances of making losses will be slim.” – nation.co.ke