Wednesday, April 28, 2021 / 05:50 PM / Rahul Sharma /
Header Image Credit: Forex News
The prevalence of the internet and smartphones have opened different avenues for people to make investments around the world & also speculate on different market instruments.
This has made way to retail trading boom where everyone is 'speculating' on global markets through their smartphone or personal computing devices. But this has its huge risks.
Even prior to the pandemic, there was huge growth in the retail trading in the last decade, traders were flocking in from different parts of the world to have a piece of the action in different financial markets and instruments like Stocks, Forex, Commodities and Cryptocurrencies.
But the pandemic the number of retail traders in Africa, and globally have risen sharply.
Growth in Online Forex Trading during COVID-19
With the pandemic helping us embrace doing business from the comfort of our homes, online trading has witnessed exponential growth.
Investors are bullish and making investments in tech stocks, forex market, cryptocurrencies, commodities to gold online.
Report by Forex Brokers South Africa highlighted that Africa is in the forefront of this growth where is there is a growth of almost 80% in the number of retail traders and retail trading volume during 2020. There are now 1.8 million retail traders around the continent, with Nigeria and South Africa accounting for nearly 40% of total number of traders in the region.
Retail Online Forex Trading, cryptocurrencies and commodity trading have seen particular interest and jump in demand from Africa. Owing to this sudden boom, several international CFD & forex brokers are aggressively pursuing the African market to cater to the demand for online trading by young millennials.
But there is a catch.
Many brokers are increasingly offering incentives to traders to get them on board, but many of these CFD brokers or online forex trading apps are not regulated by the local governments. This means that if in case there arises an issue with a particular broker then the possibility of resolving the dispute through local authorities is not available to the African traders.
Only a few countries have local regulations governing online trading in forex, CFDs or cryptocurrencies in place but rest of Africa is still in the dark. This is the reason why there have been countless scams that have taken place.
First time individual investors are often unaware of the risks or regulations of forex market and seek quick returns and get lured by promises made by unscrupulous brokers and scammers.
Some experts say some of these problems can be mitigated/managed if the public acquire more knowledge on how the financial markets operate and understand its risks before they invest - they should learn trading basics & strategies, learn the safe trading practices, practice on demo, gain experience and risk management.
But trading is not only suitable of all. It is only suitable for professionals who have acquired proper education & experience.
If you are aware of how the markets function and what are all the regulations and dispute resolution mechanisms available, then there would lower risk of being scammed.
Below is a short gist on what the Forex market is and how it operates.
What is Currency Market?
Currency Market or Foreign Exchange Market is a marketplace where various currencies can be bought and sold by different people operating from different parts of the world.
You buy the currency based on how well a country is doing and how it's going to impact the market.
What Moves Currencies Prices and How Does Currency Market Work? What are the Basics of Currency Trading?
There are countless factors that can affect the price of a currency. But the most important ones to be considered are the government policies of a particular country, the current political scenario, the economy of a particular country etc.
The currency market functions on the news relating to a particular country. For example, if US bans import of goods from China, then the Chinese Yuan will likely drop in value because of the restriction.
You either buy a currency if you think its price will go up or you sell a currency if you think its price will go down.
How are Currencies Traded?
Currencies are traded against other currencies. For example, the US dollar is traded against the British Pound.
The currency pairs change from country to country depending on which currency you want to trade in. The most important currencies are the U.S. dollar (USD), Canadian dollar (CAD), euro (EUR), British pound (GBP), Swiss franc (CHF), New Zealand dollar (NZD), Australian dollar (AUD) and the Japanese yen (JPY).
Who Trades Currencies?
The currency trading market is flooded with retail day traders. But apart from this there are large market cap players like commercial banks, central banks, hedge funds etc. that control most of the money in the market.
What are Various Currency Trading Instruments/Vehicles?
These are 4 main types of trading instruments involved in the Forex Market:
How do Individuals/Retail Investors Trade Forex Online?
The first step is to check if there is a regulatory authority in your country which regulates the Forex market. If there is a regulatory authority, then you need to check who are the authorised/licensed brokers available in your country.
In Kenya, CMA is the regulatory authority for Online Forex trading. Similarly, the market is regulated by FSCA in South Africa.
If you find a broker who offers Forex trading platform in your country along with all the valid licenses, then you deposit your KYC documents for verification and open a trading account. You can start trading soon after verification.
If your country does not have any regulatory authority, then its best if you use a well-known international broker who can carry out trades for you. Established brokers will offer good incentives and safer transactions. If there is any dispute, then you can get it resolved immediately.
Rules & Regulations on Online Forex Trading
Most developed & developing countries in the world like US, UK, Japan, South Africa have a special regulatory authority that can deal with Forex Markets in their countries. Some of the most well-known regulators are FCA, FSCA, CySEC, BaFin, ASIC, NFA etc.
Most major regulatory authorities have similar rules, regulations & restrictions. Kenya also has local regulations for online forex trading.
These regulators lay heavy restrictions on brokers operating in their own jurisdiction. Regulators ensure that the interests of the traders are always protected, therefore huge penalties are imposed on brokers if they are seen to violates any regulations.
Currently there are just two regulatory authorities in Africa, CMA in Kenya & FSCA in South Africa. Other countries in Africa are still deciding on having their own authorities. One of the main reasons why some African countries do not have their own authority is mainly because it does not have enough traders yet. Once the trader base increases then there will be sufficient funds to have their own authority.
But despite not having enough regulations in place, governments are still trying to safeguard the traders by trying to educate them on online scams. It is only a matter of time before every African country has its own authority.
Risk involved in Currency Trading
Most forex brokers will tell you about the advantages of doing Forex & CFD trading, but not many will tell you about the risks involved.
Nearly 70-80% of the retail investors who trade in the Forex & other markets with CFD brokers lose their money. All regulated CFD & forex brokers are required by major regulators like FCA, ASIC, ESMA to inform the traders about the exact percentage of traders that lose money with broker.
Even the most experienced traders in the world cannot make profits all the time. Therefore, you need to educate yourself as much as you can before depositing and trading with real money.
The biggest risk related to trading CFDs in the forex & other instruments is the leverage levels. Traders do not understand what the risks of margin trading are and could end up losing more money than they invested.
For example, if you invest $1000 at a leverage that is 1:100, then the total amount available for trading will equal to $100,000. This means that you can lose up to $100,000 even if you invest only $1000, if the trade goes against you.
Other risks involved are volatility of the market due to unknown factors, interest rates, scams etc. There are also the risks associated with trading via an unregulated broker, which could scam you.
Things and Caution before Trading Forex
You should know that there are most chances for you to lose your money than make money in the Forex market. You should only consider entering the Forex market if you have enough funds as backup otherwise this far riskier than it seems.
Trading forex & CFDs classifies as speculation and is much closer to gambling if you are unwisely trading without risk management.
There are ways to reduce your risk with education, but you must remember that trading forex, CFDs & stocks for the purpose of day trading is not investing.
But if you do decide to trade, start by understanding how the market functions and what affects the market. Set up a demo account with a Top tier regulated broker, and trade with demo money to see how well you understand the market.
Based on the news you see every day, try and predict how a particular currency will do in the market. Do this for some time until you are sure that your predictions are right most of the time, and you are not losing big when you are wrong. Understand the platform you are trading on and check out all the features and incentives the broker has to offer you.
Once you are profitable on your demo account & can trade while managing risk reward, only then deposit real money.
You need to have a risk management method to ensure that you do not lose all your money at once. Learn techniques such as stop loss etc. to ensure that you are always protected from market volatility.
Apart from all this you need to control trading every day and just trade for few hours in a day. The most experienced traders do not watch the market all day. They just trade for an hour or so and then they are done for the day.
Rahul Sharma is the managing editor for South African Forex Broker Comparison & Education website ForexBrokers.co.za. He has been active in Forex Industry for last 5 years. His research & publications mainly cover the analysis of financial markets in emerging countries.