Forex, or foreign exchange, trading is a way to make money by exchanging different currencies. It may seem like a daunting task, but with the right tools and information, it can be a profitable experience.
In this guide, we will outline some of the basics of forex trading, including what you need to get started, how to make trades and what factors affect currency values. We’ll also provide tips to help you make money through forex trading.
So, whether you’re just getting started or looking for ways to improve your skills, keep reading for everything you need to know about forex trading! We hope this information will help you on your journey to becoming a successful forex trader in Kenya.
What is Forex Trading?
Forex is an abbreviation for foreign exchange. It is an international market for buying and selling currencies. Forex is considered to be the largest and most liquid market in the world, with over $7 trillion changing hands every single day. Participants in forex trading include governments, banks, hedge funds, corporations, individual investors and retail traders, like you and me.
The forex market works through financial institutions and operates around the clock, five days a week. As a result, it is considered to be a 24-hour market. Transactions are processed through a global electronic network known as the interbank market. This network links participants in different countries who are interested in exchanging currency.
The goal in forex trading is to buy one currency and sell it at a higher price in the future. This process is called “going long.” Conversely, an investor can sell a currency that they do not own and then buy it back at a lower price. This process is called “going short.”
Currencies are traded in pairs (e.g. EUR/USD), so when one currency increases in value relative to another, the trader profits.
There are many different strategies that traders can use when trading forex, but most successful traders use technical analysis to make their decisions. Technical analysts study past price data to identify patterns that predict future price movements.
The forex market is decentralized and no single entity or institution runs it. As such, there are no set prices for currencies like stocks and bonds, but rather there is a global floating exchange rate that is determined by the supply and demand of each currency.
How to Start Forex Trading in Kenya
The first step in trading forex is to understand the basics of how currencies are traded.
Currencies are usually quoted as pairs, which means that one unit of foreign currency will be exchanged for another unit of foreign currency. For example, the EUR/USD currency pair means that the Euro is being traded against the US Dollar.
The first currency listed is called the base currency, and the second currency listed is called the counter or quote currency. When you buy a currency pair, you are buying the base currency and selling the quote currency. Conversely, when you sell a currency pair, you are selling the base currency and buying back the quote Currency.
In order to make a profit when trading currencies, you need to buy a currency at one price and sell it at a higher price. The difference (or spread) between these prices is your profit or loss.
Another important thing to note is that tradeable currencies are differentiated in the online forex market by using a three-character currency code. The first two letters of the currency code represent the country of issuance, while the third letter represents the currency within that country. For example, USD is the three-character code for United States Dollar, AUD is the three-character code for Australian Dollar, and GBP is the three-character code for British Pound.
Following the above examples, can you guess what the 3 character code for the Kenyan shilling should be?
You are right if your guess was KES.
The major currency pairs that are traded on the forex market include:
- EUR/USD Price is quoted as the value of 1 Euro to 1 Dollar
- USD/Yen Price is quoted as the value of 1 Dollar to 1 Yen
- Euro/GBP Price is quoted as the value of 1 Euro to 1 Pound
- GBP/USD Price is quoted as the value of 1 Pound to 1 Dollar.
What is the difference between the buy and sell rates?
The difference between the buy and sell rates – known as the pip spread, is the amount you pay to the forex broker for facilitating your trades.
e.g. If the quoted prices for the EUR/USD are: buy 1.1796 and sell 1.1799 – there is a spread of 3 pips or 3 one hundreds of a cent. Thus you pay 3 hundreds of a cent for every Euro or Dollar you buy or sell in this currency pairing. For each 10k you buy or sell, you pay the forex broker $3 for laying and administering the transaction.
Note: for many of the cross currencies the pip spread may rise to 10 or more.
Choosing the Best Forex Brokers in Kenya
A forex broker is a company that acts as an intermediary between traders and the global currency market. Forex brokers act as middlemen between traders by providing a trading platform and making the bid/ask prices for currencies. They also provide liquidity to the market by offering their clients to trade with other clients. And finally, they offer margin and leverage which allows traders to open larger positions than their account balance would normally allow.
A regulated forex broker is one that is authorized and regulated by the Capital Markets Authority (CMA) in Kenya, or by another financial regulator in another country.
There are many reputable, regulated forex brokers available online, and it’s important to choose one that meets your individual needs. Some factors to consider when choosing a broker include its spreads, commission rates, customer service standards, and platform compatibility.
Contrary to popular belief, forex trading is not illegal in Kenya; there are many CMA regulated and legitimate forex brokers willing to open accounts for first-time traders.
That said, it’s important to use caution when choosing a broker. It’s always smart to do research before depositing any money into an account.
Since the forex market operates 24 hours per day (except weekends), you can trade currencies at your convenience—so even if you’re working another job or attending school during the day, you’ll still have opportunities to make money through forex trading.
What is a stop loss and when should I place one?
A stop loss is a loss floor or ceiling a trader places on their order. A trader should always place a stop loss on every order. If the market moves against the trader, at least with a stop loss a trader can limit the damage and balance slippage on their account.
Example of stop loss:
A trader buys 100k Euro/USD at a price of 1.1796 believing that the market will favour the Euro and that we will see an appreciation in the value of the Euro. He places a stop loss at 1.1780. This stop loss means that the maximum he can lose is a total of 18pips – or $180 dollars for a 100k lot. If he failed to place a stop loss and the market moved against him to say 1.1750, this means that he is carrying an equity loss of 46 pips – or $460 for a 100k trade on his account.
What is a limit order?
A limit order is a cash-out point on a trade. If our trader makes an order believing the market is going to move in his direction, he may place a limit – which is the point at which he wishes to exit the position and cash in. No trader knows exactly where any market is going to finish and it is optimistic to the extreme to believe that one can earn 100% of market movement. Markets fluctuate all the time, so at least with a limit placed on a position, the trader cashes in before the market reverses and erodes his gains.
Example of limit order:
Let’s assume this is the same trade as under number 4 above. Our trader buys 100k Euro/USD at 1.1796. He believes the price may move all the way to 1.1900 before it might reverse, but he are not sure. Therefore he places a limit order at 1.1870. If he is correct and the market moves up as far as 1.1890, then his position will automatically close at 1.1870, for a gain of 74 pips – or $740. If he failed to place a limit order and the market were to reverse at 1.1890 and move down to 1.1820, our trader is sitting with only a gain of 24 pips or $240 in his equity balance. This is what his total gain will be if he were close the position manually at this point.
Alternatively, a trailing stop could be used to track the market, if the market moves in our favour. A trailing stop of 50 pips will move a stop loss 50 pips, every time the market moves a total of 50 pips in our favour. So for the same Euro/USD trade, if a trailing stop has been entered at the market entry point of 1.1796, with a stop loss of 1.1780, it means that when the market reaches 1.1846, the stop loss will automatically move to 1.1830. The trader is guaranteed to gain on the trade, for if the market were to now reverse downwards, his position would automatically close at 1.1830 and he would have made 34 pips or $340.
6) What if the price is not at the trader’s desired market entry level?
We can create an entry order in advance and thus only enter the market when the price is at our desired level.
As an extension of the above example, let us assume that Euro/USD was in an upward momentum and was currently at 1.1860. The trader may believe that it will not go higher than 1.1890 before the market will reverse, but that 1.1860 is too early to enter. As our trader will not be at the computer to watch the market, he places a ‘create order entry’ to sell Euro/USD at 1.1883 (remember when the buy price is at 1.1880 the sell price will be 1.1883, in a 3 pip spread trading environment). The trader places a stop loss at 1.1900 and a limit order at 1.1833. If the trader is right, his position will automatically open at 1.1883 and if the market reverses as per previous examples, then he stands to gain 50 pips or $500, as the transaction will automatically close at 1.1833.
Note: When using a create order entry, ensure that in the event of it not been activated when you desire, you delete the order entry so that it may not be activated at a later time, when the market and your view of the market movement has changed.
Should I Trade Forex in Kenya?
If you have no experience trading, then you should spend plenty of time learning about it and operate a Demo account to apply what you have learned. A Demo account plugs you into the real market without risking your own money – while the money is not real, everything else is. A lot of forex brokers in Kenya offer a Demo account and you can use it for up to 30 days for free.
Different traders trade different strategies and sharing of strategies, no matter how brilliant one believes their strategy may be is not going to fool or bust the market – believe us!
- If you don’t know what you are doing – don’t trade!
- If you believe this is a get-rich-fast system – don’t trade!
- If you think you were right and the market was wrong – stop trading!
- If you can’t take losses – stop trading!
Disclaimer Notice : Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
Becoming a successful Forex trader is an ongoing process. It has a beginning but no end. In every walk of life there are achievers, yet only 2 – 3% gravitate to become WORLD CLASS PERFORMERS.
Research shows that those who carry and maintain the title have or have had a parent, guardian, coach, or mentor who has taught them, pushed them and held them accountable for their actions and performance. Kenya Forex Firm LTD. will become your coach and mentor. We can teach you, push you and hold you accountable, empowering you with the ability to become a WORLD CLASS Forex TRADER!