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A peep into the world of foreign exchange

Friday September 6 2019

foreign exchange

In foreign exchange, risk-taking is as important as risk management. PHOTO | FILE | NATION MEDIA GROUP 

JAMES KAHONGEH
By JAMES KAHONGEH
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You may have heard about online trading in foreign exchange, also known as forex.

You are also likely to have heard about how profitable this venture is. But away from the profits, there are also many risks involved, including being conned.

Until two years ago, online trade in forex in Kenya was largely unregulated. Today, the industry is controlled by the Capital Markets Authority (CMA), which cushions traders from potential manipulation.

For many Kenyans however, this subject of foreign exchange remains foreign and complex.

This week, we engage two seasoned forex traders and a trainer who have experienced the highs and lows of the trade, losing money at times and making a fortune in other instances.

They share tips on how to make money in forex, how to avoid losses, and why you should equip yourself with the necessary training before investing in this highly-risky business.

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Wesley Jackson, trader

Jackson started trading in forex in 2012 after being driven by the desire to become self-employed.

While he was in school, he hoped to create employment for himself and others someday. Six years later, he is comfortably living his dream.

What is forex trading and how does it work?

In simple terms, forex is an acronym for foreign exchange. It is also called FX trading.

It is simply the conversion of one currency into another. As a trader, you buy a certain currency and sell it to those who need it to make a profit.

Like any commodity in the market, the value of a currency is dependent on its demand at any given time.

Foreign exchange is one of the most actively traded markets in the world with an average daily trading volume of Sh500 trillion.

What qualities must a trader possess to successfully trade in FX?

To make profits, you must be able to manage risks. You must also have the right knowledge and skills, preferably taught to you by someone who has been involved in the business for long.

In foreign exchange, patience is key. Like any other business, you must be willing to wait before you can make a fortune, because you will collect valuable lessons along the way.

Sometimes the market will be so turbulent, and you will lose so much money that it will take long to recover.

foreign exchange

Wesley Jackson, a trader. During an interview at Nation Centre in Nairobi on September 2, 2019, he said that the foreign exchange sector is as lucrative as it is volatile. PHOTO | DIANA NGILA | NATION MEDIA GROUP

If you want to make money fast, then forex is not your type of trade. You should also avoid trading every day, as this could impact your account negatively.

Take time to monitor the FX market and avoid the temptation to trade every pair.

A currency pair is the quotation of the value of a currency unit against the unit of another currency.

Instead, focus on one or two pairs and wait for an ideal moment to trade. A week is an ideal time frame.

In foreign exchange, risk-taking is as important as risk management. For instance, you must be willing to lose one dollar in order to make three.

It goes without saying that you must have a strategy to cushion you against huge losses.

How different is forex from other types of business?

Unlike other businesses whose successes depend solely on customers, forex is heavily influenced by large institutions and people.

These “market makers” determine how different currencies are traded on the global stage. Forex is as lucrative as it is volatile.

You could earn millions of shillings within a trading day, and you could also lose all this money within hours.

So how can a trader minimise risks to run a profitable business?

It is estimated that 95 per cent of traders (dumb money) lose to five per cent of traders (called smart money). This is largely due to incompetence.

But with a proper working strategy, risk management measures, reasonable targets set, discipline, the right knowledge and the ability to predict scenarios, one can avoid losses.

Besides the market’s volatility, what are the other challenges in forex?

Use of high leverage, which is the ratio of the trader’s funds to the size of the broker’s credit.

The forex market can also be affected by global events. High impact news such as political declarations by leaders of large economies send shockwaves into the market, and this can upset forex.

News about Brexit, for instance, affects how the Sterling Pound is bought and sold in the global market.

Disputes between China and the US bear heavily on the US Dollar and the Yen. For a trader, failure to recognise the market structure can bleed out your account, leading to failure.

What are some of the misconceptions about forex?

Many people view foreign exchange as a con game, and others as a get-rich-quick scheme. Nothing could be farther from the truth.

Before you invest your money in forex, understand what it entails, the risks involved, and how things work.

Would you encourage someone to invest in forex?

It is disheartening to see graduates struggling to put food on the table when they can learn the ropes of forex trading and make money.

With as little as Sh20,000, you can start trading. The beauty of this trade is that the more players there are, the higher the market’s volatility and the better the returns for buyers and sellers.

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Erastus Kago, a trader

Erastus started trading as an amateur in 2014 before turning professional in 2016.

What does one need to get started as a trader?

First you need to open a forex broker account. This account has to be authenticated before any trading can take place.

You are also required to submit your identification documents, a utility bill, a bank statement, and proof of residence to ascertain your identity.

What valuable lessons have you learned since you started trading?

To trade profitably, you must be sober, and good at managing your emotions. You have to make decisions based on logic.

Avoid trading when you are exhausted or stressed. Also, don’t "over trade", that is, don’t take overly unreasonable risks.

Would you say training improves one’s competence?

Yes, it does. There is a lot of free information about this subject online, so most traders are self-taught.

But when you engage a professional, you are likely to succeed. Through training and research, you are able to discover the trading options that suit you.

However, before you enlist the services of an expert, it is important to scrutinise their track record.

trading

Erastus Kago. Erastus started trading as an amateur in 2014 before turning professional in 2016. PHOTO | SILA KIPLAGAT | NATION MEDIA GROUP

Be wary of people who call themselves trainers but don’t have any trading history. The best way to understand an industry is to be actively involved in its operations.

Is forex similar to gambling?

The only similarities between the two is that none has a 100 per cent guarantee that you will get your money back.

In forex, there is a concept called strategy, where certain scenarios will recur several times.

As a trader, you need to master these repetitions, which will enable you gain more.

In gambling however, you cannot predict the outcome of, say, a football match, even where odds are provided.

When you lose, you lose all your money. There are no strategies in gambling.

Has the recent government crackdown on forex businesses affected you?

I’m strictly a trader. The people being taken into custody are account managers who operate without licences.

My business does not hold money for other traders. To do that, you need to obtain a licence from the Capital Markets Authority, and some account managers overlook this. A trader only needs to pay your taxes, and be prudent.

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Gilbert Kimari, Head of Training, Nairobi School of Forex

Gilbert’s journey in forex trading began in 2007 when he was still in college. He wasn’t keen on employment.

He wanted to start and grow a business which he could then pursue after school.

Growing up, he was always fascinated by financial markets, and he developed this interest by watching movies that highlighted the activities of Wall Street.

Twelve years later, Gilbert is not only an accomplished forex trader, but a forex trainer too.

How did you become a forex trainer?

After I established myself in the trade, people around me started asking me to teach them how forex works; and I would do it for free.

Afterwards, my friends (also experienced forex traders) and I designed a course on online forex trading. We hoped to train those interested on how the industry operates. This is how Nairobi School of Forex came into being in 2018.

What is covered in this course and how long does it take?

The course covers market analysis, risk management, planning and strategy development, as well as understanding the international forex market.

It also covers trading on major stock market indices and precious metals too. The course is open for all, lasts two months, and costs Sh50,000.

Why is it important for a trader to undergo training before investing in FX?

Before you start any business, you must understand what it entails. The same applies to online forex trading.

Leveraged investments such as forex trading carry a higher risk than other types of investments.

It is therefore necessary to understand these risk so that you can manage your capital well and achieve consistent returns.

Training gives prospective traders a strong foothold when getting into this business.

foreign exchange

Gilbert Kimari. He says training gives prospective traders a strong foothold when getting into the foreign exchange business. PHOTO | COURTESY

The forex landscape in Kenya has been unregulated for many years. How is it like to operate in such an industry?

The forex market is a banking network where the banks are interconnected for the purpose of buying and selling currencies on behalf of their clients.

Foreign exchange and its trade is therefore regulated by the Central Bank of Kenya. The CBK regulates the flow of money within Kenya.

Online forex trading, which involves speculating on future currency price movements using derivative contracts, had remained largely unregulated in the country until 2017 when the CMA created a legal framework for companies that wanted to offer forex brokering services and fund managing services.

This allowed such companies to set up shop in Kenya and operate in a regulated environment.

In what significant ways has the entry of CMA influenced trading?

Online forex trading laws gave CMA the power to regulate and ensure compliance by all companies offering forex brokering and fund management services.

As a result, the public is now protected from exploitation by rogue forex trading schemes which were prevalent before the regulations came into effect.

Under these regulations, the market has improved because traders can now engage locally registered forex brokers instead of relying on forex brokers who are licensed in foreign countries. The laws have encouraged more people to invest in forex.

What is the future like for forex traders?

It is brighter. The CMA plans to open up the country to innovations in the financial sector so as to help the country realise its objective of being a major international financial hub.

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