Three key points beginners should know before you start forex trading
Online trading by retail investors is at all-time high in Africa & globally in 2021. It is estimated that there are over 1.8 million active day traders, and this number has increased by nearly 100% since the last year.
The crash in the global financial markets in March 2020 from the fallout of Covid-19 pandemic saw the global financial markets like NASDAQ drop by nearly 30%. Oil price even traded in negative during April 2020 due to demand shock. Some emerging market currencies like BRL, ZAR, TRY lost as high as 40% in value, although some have recovered now but others are still trading at or near their lows.
Many young millennials saw this as an opportunity to trade & ‘speculate’ on all volatile financial instruments including forex, stocks, commodities & cryptos.
Owing to increased trading demand in Africa from retail traders, most of the leading forex brokers from South Africa & Kenya have witnessed almost over 100% increase in the volume of CFDs traded on the Forex market & other CFDs compared to 2019. The major forex brokers like Plus500, IG Markets, XM, Tickmill, Exness have all reported huge growth in their trading volume as well as customer base.
But trading in the forex market is very risky & nearly 80% traders are said to lose money. If you are a trader considering trading forex & CFDs, you should know these things first.
Forex & CFDs are a leveraged market instrument that come with high risks
Whenever you trade forex or any other instrument at a CFD broker, these are traded as CFDs. With CFDs, you don’t own the underlying instrument, but you are simply betting on whether the instruments price will rise or fall.
As an example, if you think that the price of GBP will rise against US Dollar due to Brexit, then you can place a ‘Buy’ or ‘Long’ order with your forex broker. But there’s more.
To compound this risk, all CFD brokers offer leverage, which can be as high as 1:2000 at some brokers, which essentially allows you to trade a position much larger than your own invested capital.
You would think how it is risky?
Here’s an example to explain this to you. Let’s say that you invest in $15 in ‘Gold CFD’ at a leverage of 1:100 at a price of $1500. If the price goes up to $1600, then you would have made a profit of $100, which is a return of nearly 6.7x your capital.
But in case the Gold price drops to $1485, then you would lose your entire capital.
Almost all beginner traders get attracted to forex & CFDs as they see that the returns on the 1:100 leverage ratio gets them huge returns, but they don’t consider a scenario when their predictions go wrong.
It’s because of this reason that even the most experienced traders choose not to use high leverage ratios as it can wipe out their capital during market volatility. Also, major regulators like ASIC, ESMA, FCA require their regulated CFD brokers to restrict the leverage they can offer to non-professional traders.
Broker’s Reputation & Regulatory compliance is a must
When trading forex there are so many brokers that traders can choose from. But not all the forex brokers are the same, or regulated for that matter.
Due to the widespread corrupt practices by scammers & fake brokers, regulators around the world ensure that traders are not cheated by brokers. Since new traders are not aware of the regulations, unregulated brokers & scammers often use mislead them and lure them into fake investment plans.
There are several well-known regulators around the world such as FSCA, ESMA, FCA, CySEC, ASIC etc. that constantly monitor the market and regulate broker/trader behaviour. And if there’s any dispute, regulators can intervene to allow some sort of grievance redressal.
In Africa there are only two countries which have dedicated regulations for online forex trading. The Forex market is regulated in Kenya by CMA & in South Africa by FSCA. Most countries in Africa are yet to form their own policies or regulations for online forex & CFD trading.
But this puts investors trading from countries where there are no local regulations for online forex trading like Nigeria, Malawi etc. at risk.
In such a situation where there is lack of local regulations in your country, you must choose a forex broker that is licensed by Tier-1 & Tier-2 regulators.
For example, the forex broker Exness is licensed by FSCA & FCA, so African traders can choose them. Similarly, you can choose any other forex brokers licensed under European and Australian jurisdiction like FCA, ASIC, CySEC etc.
You should check which brokers are regulated by checking on ‘search’ page on regulator’s website. Them choose the broker that is well reputed out of the regulated once.
Only once you have found a licensed & reputed forex broker, then you should submit your KYC documents or deposit any money. Regulated brokers have their own dispute resolution mechanism which can be reviewed by regulators, so it will be easier to resolve conflict.
Beware: Profits are not guaranteed – Nearly 80% traders lose
As profitable as it may sound to be, trading in the forex market is highly risky. This is the main reason why trading Forex & CFDs is very close to gambling according to some investors. You can either hit a jackpot or you can lose it all, it’s a decision that you will have to make.
You may have seen an online ad claiming how someone is making easy money from their home in a short period of time, and how easy it is to trade. But it is quite the opposite.
Infact, it is a well reported industry stat that nearly 70-80% traders lose money while trading forex & CFDs.
There are countless factors that affect the market and it’s not possible to monitor all factors. There’s only so much that you can do before you decide to buy or sell in the market. This is why experts say that people should consider trading in the Forex market only if they have experience of trading CFDs, and have money to lose as the possibilities of losing money are really high.
No one can promise that you will make money in the Forex market, not even traders who have years of experience can guarantee you that. That’s simply how the nature of the market is, due to its high volatile function, it’s not easy to make correct predictions all the time.
There are people who make money in the Forex market but they eventually lose all of it back in the market due to over trading. It gets highly addictive and beyond a point you will not be able to control yourself.
This is the reason why regulators like CMA and FSCA have regulations in place to reduce the risks for traders & protect them from losing all their money. One of the best policy implementations was to reduce leverage options available to new traders so they don’t suffer heavy losses.
As traders gain more experience, you can open a Professional trading account with higher leverage. But beginner traders must avoid using any leverage.
A recent study on the Forex market revealed that only 15-20% of the traders make a profit at some points whereas others just lose their money.
People are easily drawn into high return on investment options because fear of missing out. Regulators have time and again said that markets are not a place to make quick money, it requires a lot of patience, learning, risk management.
CFDs & forex are only for educated investors, who have experience & understand the risks. New investors should stay away, and only trade in the markets once you have proper experience & education, and understanding of how to manage risks.
Caution for beginner Forex Traders
Trading Forex, CFDs & any other financial instrument is an extremely technical field that requires a lot of research, patience & education. Even that does not guarantee any profits.
You may be drawn towards forex as you see it as a money-making scheme. But the next time you see an advertisement like this, ask yourself that if anyone can double their money in a matter of days, then shouldn’t everyone be doing this?
You should consider Forex trading only if you understand how it functions, otherwise it’s best you try other businesses which don’t require such expert attention.
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