Capital Markets Authority (CMA) of Kenya has made online forex trading in Kenya more regulated now.
Trading with a licensed broker with ensure that your funds are protected & you can get compensation of upto Kes. 50,000 in case the broker goes out of business.
To trade forex in Kenya via a locally regulated broker, you need to open an account with any of the forex brokers regulated and licensed by CMA.
There are six such brokers who are regulated by CMA: EGM Securities, PepperStone Kenya, ForexTime (Exinity Group), HotForex, Windsor Markets and Scope Markets.
There are also global foreign regulated forex brokers accepting traders from Kenya - that are regulated with foreign regulators like Financial Conduct Authority (FCA), Financial Sector Conduct Authority (FSCA), Australian Securities and Investments Commission (ASIC) and the likes.
It is recommended that you choose the only brokers that are licensed by CMA. Only this will ensure that you are trading forex legally.
Most brokers now have low deposit requirements of as low as $5 to open Live trading account & start trading. As an example, HotForex has $5 deposit with their Micro Account.
Start with Demo Forex Trading Account.
Almost all the brokers provide demo accounts. Demo accounts are like real trading accounts, and your can trade and understand the nuances of trade just like real trading account without risking your real money.
Your demo account will have dummy funds, and you can use them to test out your strategies & learn under real market like conditions.
Note: The market & trading conditions with a broker's demo account platform would likely not be the same as Live account. But it is still a good place to learn trading.
Once you have gained enough experience & are profitable on demo for a consistent period of few months, only then you should move to Opening Live Account with real money.
LIVE ACCOUNT.
Generally, the steps involved are the same. You need to fill your 'Account Information' details, your Financial Adequacy information. Then you need to submit your 2 KYC documents i.e. ID Proof & Address proof to complete the verification.
For the KYC, it is essential that you submit valid documents as this will prevent any issues during withdrawals. For ID proof you can submit copy of your Passport or any other National ID. For Address proof, you can submit your phone or any other Utility Bill.
For Live accounts, brokers can either be market makers or provide DMA (Direct Market Access) & DMA brokers are either ECN or STP. ECN (Electronic Communications Network brokers) is where the investors directly get connected to the other investors in the Forex Markets and the fee is calculated by the volumes traded by the clients that pass through the ECN environment.
STP or Straight Through Processing is where the broker passes the trades to liquidity providers for execution and gives access to interbank market structure. Even though having DMA gives you wider access to markets with higher rewards and risks, but finding true brokers providing DMA is difficult and tricky.
You should avoid brokers that are market makers as these brokers take position against you. So any loss that you make with a market maker forex broker is the profit of that broker.
All the CMA licensed online forex brokers are 'Non-Dealing' which means they don't operate a dealing desk. So, they are not market maker brokers.
If you are a beginner, you should choose brokers with standard spread accounts only where the broker preferably offers STP accounts.
The expert traders can go for ECN type account. These have low fees but commission is charged as per the trading lots.
If you are a trader trading high volume, it would be right decision to open your trading account with Zero Account for saving on the broker's trading fees.
How much do you need to Start trading Forex?
You can start forex trading in Kenya for as low as KSh. 500 deposit. The exact deposit requirements depend on broker to broker & are different for various payment methods.
Many brokers offer a lot of options when it comes to opening accounts with them. All these accounts require a minimum account balance.
You can find the minimum deposit on the forex broker's website or during account opening.
The minimum that is generally offered by many brokers is $5 (with Hotforex, FXPesa Kenya & XM Trading) but we recommend that it would be better to open a trading account with a minimum of $500. This would ensure that a sizeable position could be taken in trading and a good profit could be earned on positive market movements.
However, it should be kept in mind that a position would depend on the balance maintained and the leverage offered by the broker. It is generally advised that a day trader shouldn’t risk more than 1% of their forex account on a single trade. That means, if your account contains $500, one should not risk more than $5 per trade.
Trading positions also depend on the lot size that one opts for.
One can trade in Standard lots (100,000 units), Mini lots (10,000 units) or Micro lots (1000 units).
If USD is listed second in the currency pair, like EUR/USD or AUD/USD, and your account is being funded in USD, the value of pip per lot type is fixed.
Hence, value of one pip for a Micro lot, a Mini lot and a Standard lot is $0.1, $1 and $10 respectively.
Knowing this information is very helpful as this would help in determining the level of risk one can take and what position to take in the trades.
Let us assume we have $500 in our account and would like to trade on Mini lots for EUR/USD, currently at 1.084. The broker offers a leverage of 100:1 and 0.4 pips in spread for the EUR/USD pair.
One Mini lot of EUR/USD can be bought with $108.4 of capital (1 Mini lot = 10,000 units * $1.084 = $10840 / 100 leverage = $108.40).
With $500 in account, we take up a position of 40,000 units or 4 Mini lots of EUR/USD pair, resulting in total capital invested be $433.6. With a positive movement of 1 pip in EUR/USD, we would gain $1 per lot. Hence, the total gain on our position would be $4. From this, we reduce the broker’s spread of 0.4 pips per lot to reach out net profit of $2.4 on our position of 40,000 units.
Starting out with a moderate amount of capital like $500 gives you the flexibility to trade as trading with very low capital & using high leverage is very risky.
Generally, the very liquid forex pairs have changes in the range of 100 of pips. So, one can generate a good return if you trade wisely with low leverage. However, the risk appetite should also be kept in mind.
During volatile market conditions, using high leverage can be very risky. For example, if your account size is $1000, and you are trading 1 Standard lot, which is 1:100 leverage, then your account would be 0 with just 100 pips movement. A major currency like EUR/USD can easily move 100 pips intraday.
How can you deposit & withdraw for Forex Trading in Kenya?
Regulated forex brokers like FXPesa, Scope Markets Kenya, PepperStone Kenya allow traders the option to fund trading account in KSh. using local bank trasfer via bank account in Kenya. With this method it can generally take upto 24 hours for the broker to credit your trading account.
You can also fund via credit/debit cards & Mobile money like MPeasa, Airtel money etc. Generally both these methods are instant for funding, and it takes few hours in case of withdrawals.
For example, the typical withdrawal time at CMA Regulated FX broker FXPesa is few hours for Ewallets & Mobile money. But it takes few days for withdrawals in your bank account.
The 4 main risks involved in forex trading are:
1. Forex market is quite volatile.
As per the global financial markets, the fluctuations in exchange rates could be various economic, geopolitical, social, etc. factors. The currency pair which can give a profit today may incur a loss tomorrow.
Therefore, to cover the volatility risk, one has to study the exchange rates and currency movements very carefully.
For example, the CMA licensed forex brokers don't offer GSLO (Guaranteed Stop-Loss Orders). With this order, the broker charges a premium, and guarantees that your set stop price will be hit by the broker.
In an event, like a Central Bank Intervention, or some event, the price can move very quickly within seconds. It is also possible that your stop-loss order might not get executed at the price which you had set at your forex broker.
During such an event, your account equity can go into negative or you might incure more loss that you were willing to take, because of failure to execute at a price which you had set.
Therefore, you must understand the risk that your stop-order might not trigger at your set price, due to market conditions. By understanding this risk, you can prevent situations where there are likely events of intervention or similar triggers which can cause liquidity gaps in the FX market.
2. Poor Risk Management and High Leverage.
In forex trading, the risks of incurring huge losses should be covered using hedging instruments like derivatives. High leverage means trading on the capital which is not owned or is borrowed. So, if the leverage is high then the losses on that becomes a double burden on the investor to pay off.
It is important to understand that your risk is unlimited when you are trading currency pairs as CFDs. For example, if you decide that you want to short EUR/USD, based on the theory that the interest rates in the US are going to go higher, but the market does not go in your direction, your loss can be unlimited (if you are not using a Stop Loss).
Unlike options, forex trading at CFD brokers is naked shorting or longs, and the risk is not capped if you are not using any Stop Loss. Whereas in options trading, your risk is capped to the amount of your 'Premium' paid to the option writer/seller.
But with Forex Trading via CFDs, you can lose more than you entire equity, if your broker does not offer negative balance protection. Let's understand this through an example.
Trader A is Long USD/JPY at 150 (let's say because according to him/her the trend is up, so it should go to 152). But he/she did not predict that the BoJ might intervene, causing the price to go to 146 in few minutes.
If the trader A is trading 1 Standard Lot (6.69 USD per pip move). then the trader will lose almost 2600 USD in this trade. If the account balance is 10,000 USD, this make the loss 26% of your equity.
This is why CFD trading on forex or any other intrument is very risky, as there is no limit to the losses. If you are using leverage, then you can lose large percent of your equity on a single trade.
3. Risk of Unregulated Broker.
Regulated brokers provide a guarantee of your money being used for your trading only & reduces the risk. The unregulated broker can use investor’s money for wrong purposes and may mis-lead the inventors with fraudulent schemes.
To safeguard the money invested and to cover oneself from any fraudulent practices, one must always trade with regulated brokers.
When you are trading via an unregulated broker, which means your counterparty is unlicensed to operate in Kenya, then they don't have to follow the guidelines mandated by the CMA. Unregulated broker can even act as the market maker, and take the opposite side of your trades, so when you are losing, the broker is making money.
There are only nine non-dealing Forex Brokers who are authorized by the CMA. Trading forex via any other non-licensed entity puts you at risk, and there will be no investor protection if the broker is a scam.
CMA has published their 'list of licensees' which can be verified from their website. Only the entities listed under 'non-dealing online foreign exchange brokers' are considered legal & safe for retail & professional forex traders in Kenya.
4. Unpredictable markets.
The risk-reward ratio should be calculated before investing as the markets are volatile and an investor should be sure how much money is expected to be gained and what is the maximum loss that can be incurred.
The predictable loss should always be less than the predictable profit. There must be a limit stop loss order in place that protects against loss to the minimum.
Markets can be extremely volatile during news or events. For example, the Euro currency would be extremely volatile during ECB meetings. If the market expects one thing, but the Central bank surprises, then you can expect even higher volatility.
Another major risk during such events is that your Stops might not get triggered at the desired price, due to gaps, and it can lead to higher losses & even a margin call.
The best way to reduce these risks is to understand Forex Market fully & learn risk management before investing.
Here are some tips that Beginner traders should stick to:
Always keep track of any Economic news that could affect the currency values. Forex market & the currency values depend on several economic factors.
Use a proper Money Management & never risk more than 10% capital on a Single trade.
Forex and CFDs are risky products and should be studied well before starting to trade.
Never use more than 1:10 Leverage while trading Forex & CFD instruments.
Always use a Stop Loss & stick to it.
Remember, Trading CFDs are risky instruments as they involve a leverage. The loss incurred may be more than the money invested. Hence, these products should be tracked and tested on demo before trading live.
The money invested in Forex & CFDs should be kept purely for trading purposes and the investor should be ready for both profit and loss of the entire capital. The traders in the financial markets lose money, as losing is one of the aspects of trading. Therefore, do not invest any money which you can’t afford to lose.
Forex trading can be very risky even for educated seasoned investors & traders. If you are just starting out, it is really important to spend as much time as you can to learn about the concepts of Forex, CFD trading; it's risks, strategies etc.
Once you have learned the basics, start by opening a demo account with a broker of your choice. Trade using that demo account until you have a good strategy that works, and has been tested over a period of 3-6 months minimum.
once you are fully comfortable, then you can start by investing real money. Start with low capital, and trade mini lots only.