Retail Forex Trading is becoming popular in Kenya and this is evident because Kenya now has over 100,000 retail forex traders. However, the fact that many Kenyans can download a trading platform and start trading forex doesn’t necessarily mean that they are all making a profit.
Before you jump right into retail forex trading you need to find out if you can really make money trading forex in Kenya. This is because every location is different and has their own rules governing retail forex trading.
While capital market regulators in some countries are not strict on leverage, some others may have stricter regulation concerning leverage. While some countries regulate retail forex trading, some countries do not. What a broker offers in Kenya is not what that same broker will offer in say the United Kingdom.
When it comes to retail forex trading, it is important to find out what is applicable in Kenya and make your decision to trade forex based on that. A large number (about 80%) of forex traders lose money while trading and this also implies that only a very small number of traders make money. This means that out of 10 traders, 8 will lose money while trading forex.
Why you may not make money trading forex
- You are exposed to high leverage
Leverage means taking a loan from your broker to trade with. The Capital Markets Authority (CMA) is Kenya’s watchdog for the capital markets and they license and supervise all forex brokers in Kenya. The CMA has also set the maximum leverage that brokers can offer to traders at 1: 400
A leverage of 1: 400 means that with $1 of your funds, you can trade in $400 worth of currency. This means your losses will be higher if the market were to move against you.
Before you start using leverage your broker will ask you to deposit an initial margin into your account which is inverse to the leverage. In this case 1/400 or 0.25% of the total contract sum.
If the contract sum is $100,000 it means you only have to deposit $250 to open a trading position. This means that $250 is your own funds and $99,750 is borrowed from the broker. Your broker will close your positions once they realizes that you are losing, so as to recover his $99,750 and stop your account from going into negative.
In other countries like the U.K. leverage has been pegged to 1:30 but in Kenya, it is as high as 1:400. With so much leverage at your disposal, if the market moves against you by even a bit, you could lose all your initial margin deposit.
- Non-dealing brokers can be expensive
The CMA issued 6 non-dealing licenses to forex brokers in Kenya. They are FXPesa, Scope Markets, Pepperstone, Exinity, Hot Forex, and Windsor markets.
Unlike dealing brokers, non-dealing brokers (NDBs) do not trade against you by acting as the counterparty. Instead they pass your order to a liquidity provider such as a Bank.This means that they miss out on the spread they would have earned if they were the counterparty.
The spread they would have earned goes to the liquidity provider so to make up for this, they charge commissions for linking your trade (via ECN or STP networks) to a liquidity provider. This charging of commission can be expensive and reduce your profits.
In a nutshell, non-dealing brokers like the ones in Kenya, are safer for traders as there is no conflict of interest.
- Your profits may be eaten up by taxes and hidden fees
Brokers usually charge commissions but if your broker charges zero commission, he could make up for it by inflating other fees. Some brokers charge fees such as:
Withdrawal fees- when you make withdrawals above a certain limit
Swap fees- when you use a currency with a higher interest rate to buy a currency with a lower interest rate you are charged a swap fee when the position is kept open overnight.
It is even worse when you open the position on a Thursday as the rollover date becomes Monday since the market closes on weekends. In this case you are charged a swap fee for three days
Inactivity fees- when you don’t use your account for a while.
You also pay a short term capital gain (STCG) tax of 5% to the Kenyan Revenue Authority when you profit from trading. If not properly managed, all these fees and taxation can take a toll on your profit and leave you with almost nothing.
- The markets are highly volatile
The volatility index (VIX) measures how much fear and risk is in the market, and when the VIX is below 20, it is means risk is low in the market. However as at April 2022, the VIX figure is 22.68 which indicates high risk in the markets. This is partly due to the Russia- Ukraine war and the hike in interest rates by the U.S. Federal Reserve.
If you decide to trade forex in Kenya, the factors discussed above are what you will have to deal with. A lot of people claim to have made fortunes off forex trading but it is not true. They are just marketing gimmicks to draw in more customers.
If you must trade forex as an individual, remember that you will not make enough money to be considered rich.
Large banks are able to trade forex profitably because they have immense capital, technology and manpower. As a retail investor you don’t have this at your disposal. The best way to create enduring wealth is by investing in the capital market as this is less risky and more rewarding in the long run.