Investing in speculative forex trading seems to be enjoying a great deal of popularity in Kenya nowadays. All types of media from news dailies to glossy publications are extolling the benefits of investing in foreign exchange.
Forex trading goes under a few different names. Some call it forex, others foreign exchange but for many it is simply FX.
The forex market is the largest and most liquid in the world. About $3 trillion is exchanged every day in this gigantic market which never sleeps, except on Sundays. This 24 hour trading cycle provides its own advantages, most notable of which is the elimination of overnight “price gaps” so commonplace on stock exchanges.
The forex trading market is also unique in that it is not conducted through a central exchange but on the “interbank market”. This essentially means short term borrowing and lending directly between banks on electronic networks all over the globe, rather than through a third party such as a stock exchange.
The main banking centres are Sydney, Tokyo, London, Frankfurt and New York. Since these centres are located around the globe, there is always an overlap where at least two banks are open at the same time. This is what creates the 24 trading cycle.
Different currencies are exchanged as part of the supply and demand for money used to purchase or sell local products. For example, the Australian resource boom in 2007 created a demand for Australian Dollars (AUD) because foreign countries had to pay for these natural resources in that currency. This caused a strengthening of the AUD exchange rate against other major currencies, including the US Dollar.
As one currency is exchanged simultaneously for another, it creates what is called a “cross” rate. This rate is expressed in terms of the value of one currency against the other. For example, if the AUD/USD cross rate is 0.8542 this means that for every one Australian dollar you can only buy 85.42 US cents. The most commonly traded and consequently most liquid currencies are called the “majors”. These are USD/EUR, USD/JPY, USD/CHF and GBP/USD.
The best forex trading market to focus on is called the “Spot Market” because there trades are settled immediately or “on the spot”. Other less liquid forex markets include futures and options markets.
Trading on Margin
If you trade on margin, it means that your capital outlay is only a small percentage of the total value of the assets traded and that someone else finances the balance.
The smaller the margin deposit, the greater the remainder that is financed. So if your margin is only 1 percent it means that your dealer or broker is financing the other 99 percent of the trade value. The advantage to you is leverage, but this can also work against you.
At 1% margin you can use 1,000 units of your capital to purchase 100,000 units of currency. Your leverage is 100:1 in this case and your returns or losses correspond to the price fluctuation of 100,000 units of currency.
This is why you should not maximize your leverage (reduce your margin) too much. Whilst your profits may be spectacular, your losses could easily be more than your original capital and wipe you out. The percentage of your capital outlayed on any one trade should be a major part of your money management system.
In summary then, these are the major advantages of forex trading over other financial instruments:-
1. 24 hour trading cycle – no price gaps
2. Better liquidity – up to $3trillion exchanged daily
3. No commissions – dealers make their money on the spread
4. Margin and leverage – provided it is used wisely
5. Profit in falling markets – you have the choice how you pair the currencies – e.g. EUR/USD or USD/EUR
Finally, there are a couple of terms to be familiar with. The first is the “spread”. This is the difference between the buying and selling price of one currency, usually called the “Bid” and the “Ask”. The second concept is about “pips”. The “pip” is the smallest unit by which a cross price quote changes. In the case of a major like the US Dollar for example, one pip equals 0.0001 dollar, since the bid and ask prices run out to the 4th decimal place.
Forex brokers and dealers compete by offering tight spreads. You’ll hear offers like “only a 3 pip spread on the majors”.
You can become familiar with the above concepts by opening a free demo account with Forexyard. They provide a “virtual trading” account where you get an imaginary $25,000 and can use it to trade live prices using their state of the art charting program.
Let’s look a little closer at forex trading basics and look beyond the high praises. This introduction to forex basics will explain the risks involved as well as the realistic profit potential and how to start forex trading in Kenya.
What is Forex Trading?
Basically, forex trading is making money through the exchange of foreign currencies. Given the volatile nature of the forex market, savvy investors stand to earn good profits should they manage to buy currencies right before a jump in prices then selling as it peaks. Because of this nature, it bears some similarities to stock market trading.
An expectation that the value of a certain currency would rise or fall predictably over a medium to long period of time could make it a good investment over the long haul.
However, traders generally prefer trading within a much narrower time span. Their methods tend to focus on trading forex in shorter times with relatively modest profits on individual trades.
Often traders will open and close a trade in a matter of minutes, buying currencies they think are about to jump or selling those that they think will drop. They do this on the basis of a perceived pattern or trend that they foresee, reacting to certain predictive indicators that they track.
The profit making potential of forex trading in Kenya has steadily become more accessible to individual, non-institutional investors. Since fast internet connections are now commonplace in most homes, brokers are quick to service this new and growing market of individuals that possess modest investment budgets. Thus, trading with just a few of hundred dollars to start is now possible with the advent of forex mini accounts.
A large number of systems now exist which the new investor can utilize to educate themselves with the skills necessary to succeed in forex. Aside from these, there are also forex robots (eg. FAP Turbo Robot Software) which are automated forex trading systems. They open and close trades without the need for human intervention.
The risks in online forex trading
The dream of making huge profits in a relatively short time is common among forex trading beginners. This often results in some degree of disappointment when their dreams are not realized as quickly as they had hoped.
Forex trading demands a number of skills and a high level of discipline and control from the individual. Those who don’t possess these traits can acquire them gradually by educating themselves and through trading experience.
Keep in mind though that global events can have significant repercussions on all markets including currencies. Events such as the World Trade Center disaster can arrive out of the blue with equally disastrous effects on markets.
To protect from being wiped out by such events, traders place automatic stops on their trades. These stops are intended to close your trades automatically should market events suddenly become unfavorable. Stop orders aside, losses are a reality that should be weighed versus the promise of profits.
So while one can make a good living trading forex in Kenya, it most certainly isn’t the safest and steadiest money making option for your investment dollars.
Sit down and weigh the pros and cons, and take stock of your personal capabilities to handle the demands of the market. If you do decide that forex trading is for you, take the time to prepare yourself by studying forex trading basics at the outset.
Avoid Common Forex Trading Mistakes
To be a part of the 95% of the traders who bear losses just has to make any one of the mistakes given below. Thus to achieve success in currency trading, one needs to avoid the following.
1. Depending on Others for Success:
The common thinking trend amongst the novice forex traders is that success can be bought with the help of someone else. But even though there are a lot of individuals around to help you , no one will be able to buy success for you except yourself. To gain confidence and to be able to follow any discipline one needs to understand the logic of the system he is buying completely.
2. Forex Day Trading Functioning:
Day trading is never the thing to do, each and every short term movements are being random. The ones who are new, try day trading more with respect to any other form and get duped by exaggerating advertisement and sales copies however.
3. Scientific theory to movement of Forex Markets:
Fibonacci. The best selling courses by Gann and Elliot wave have a grand business but never tend to work i.e. for the reason if the markets functions are based on scientific theories there will not be any markets at all as there would be answers predefined for everything. Still there are people who think that there are methods of beating the market by some scientific formulas.
4. Prediction to Win:
You will never be rewarded for your predictions but will only lose on your equity if you go on predictions, as guessing or hoping seldom helps. Rather one should study the momentum indicators and trade when they are sure that the price momentum has turned their way. In such a situation the chances will be on your side as you trade on reality on the forex charts.
5. Markets Move to Supply and Demand Fundamentals:
To some extent the markets do move to the supply and demand fundamentals but trading on them isn’t possible as communication is too fast and the important news in quickly discounted in the value. Thus one can’t catch up and win on it.
The best way is to follow the charts and allow the price action to guide you as we are inspired by emotions and thus the costs don’t always move the way one wants.
Thus one needs to remember the following equation:-
Supply & Demand Fundamentals + Investor Psychology = Market Movement
6. News sources on the internet are useful:
To keep emotions away from trading one needs to avoid listening to the news, as we have already seen that the fundamentals discount immediately. Again, the news is quite at times not false and basically people’s opinions which are quite convincing.
7. Leveraging is The Factor to Gaining Profits:
Excess of anything isn’t good. In the same way excessive leveraging is also not recommended. Don’t leverage too far, one doesn’t need a 400 : 1 ,10: 1 is sufficient for most of the traders.
8. You don’t go Broke Taking a Profit:
Trying too hard to mislead a risk and giving yourself no scope of winning, a lot of traders actually create the risk. The losses will never be covered if one doesn’t run the profits.
The solution is to take calculated risks. Snatching or tightening stops too quickly wont help.
9. The More Money Put In The More You Will Earn:
Hard work doesn’t pay you in forex trading. To be rewarded one needs to be right about the trading signals.
10. Confidence & Discipline Are A Peice of Cake:
The reason why following someone else will not help you in making money is that it takes a through knowledge of the methods followed and your own emotions and discipline and self control come form this understanding. Never try to acquire them.