What you need to know about forex trading

by Business Times
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Forex trading has been gaining in popularity around the world and especially in African countries, including in Uganda. The COVID-19 pandemic led to a huge increased number of new retail forex traders who are trading range of CFD instruments.

Forex trading refers to the trading of currencies to profit from price movements. For example, traders can buy the EURUSD currency pair. If the price of the USD currency rises in comparison to the EUR, then the trader can profit by shorting EUR (also called selling) i.e. buying USD currency pair at a higher price against the EUR & then selling it later.

The forex market is a highly volatile market and traders can also use leverage offered by brokers. This means that the profits that can be made from forex trading is significant compared to your deposit size. However, traders should remember that the risk of facing losses is also substantial, and you can lose more than your capital.

Across the globe, about $6.6 trillion in volume is traded every single day in the Forex market. If juxtaposed with other financial markets, this figure is a huge amount among the market sectors.

Retail Trading in the Forex market is growing in Africa, with many brokers opening regional offices. The volume of trading is not very high, but there are estimated to be over 1 million young retail traders in the region & whose trading volume is increasing daily.

Uganda is one of the countries where online forex trading by retail traders is growing. And this growth has its risks, the major being the losses for retail traders.

The exchange rates of the currency pairs traded in the forex market are highly unpredictable, as they fluctuate very frequently. So, many traders often lose when trading forex.

It is a well-known fact that 70-80% of the retail traders lose in Forex Trading, but this has not deterred retail traders from still trying to make it.

What are the reasons for the growth in Online Forex Trading in Uganda?

According to experts, there are a few contributing factors for the recent growth in retail participation by traders in Africa.

One of the main reasons is the increase in internet penetration brought by cheaper mobile phones & data packs

When access to reliable & cheap internet connection, traders are able to use a laptop, tablet or smartphone to engage in online Forex trading. So, brokers offer their platforms on multiple devices.

Secondly, there is continuous competition among brokers who want to target clients in the region, which has led to an increase in marketing spend by the brokers. 

Another factor is the increased access to information for retail traders, which has made Forex trading more popular and accessible.

What you must know about Online Forex Trading

Some of the facts you need to know about online Forex trading in Uganda are.

CMA currently has not issued license to any forex broker as per the list of licensed firms. Due to the absence of forex regulation in Uganda, traders are exposed to rogue brokers who operate from international locations and seek to defraud them.

Since retail Forex trading in Uganda is not banned, it is allowed.

The absence of government regulation doesn’t make it illegal, as it is currently not illegal to trade forex in Uganda with foreign CFD brokers. In the face of absence of regulation, retail Forex traders choose to open accounts with foreign forex and CFD brokers who are licensed and regulated from other countries, mostly in Europe.

For example, in the UK, online forex trading is regulated and there are many regulated forex & CFD brokers. Some of these CFD brokers also accept clients from Uganda. So, many Uganda based forex traders are open account & trade with brokers in the UK.

To be on the safe side, traders should check the regulatory status of the foreign brokers you want to trade with. You can do so by visiting the regulator’s website of major regulator which the broker claims to be licensed with and conducting a search for regulated entities. Doing so will serve as a protection against unnecessary risks and scams.

It is noteworthy that despite the absence of regulation on retail trading of forex & CFDs, thousands of people still trade forex in Uganda. 

The lack of a regulatory framework should naturally be scaring potential investors away, but the reverse is the case as many residents continue to embrace it in large numbers.

2: Most of the Retail Traders Lose

Many of the regulators have reported that most of the retail traders trading forex lose their money. 

Since forex trading involves accurately predicting the price movements for currencies, and it can also involve the use of leverage, many traders lose because of these risks.

Forex Brokers in Uganda don’t warn traders about these risks, so many traders are unaware.

3: There are no restrictions on leverage

First and foremost, you need to understand the meaning of leverage.

Leverage in Forex means you can enter a trading position that is more valuable than the funds you have in your trading account. 

In a simple statement, it is the ability to borrow funds from your broker to control larger trades. That is, leverage puts you in a position to control something big with something small.

Leverage trading is expressed as a ratio.

Let’s assume you have $1000 in your forex brokerage account and you select a leverage of 1:100. You will be in a position to control $100,000 which is 100 times your initial deposit of $1,000. 

Margin and leverage are interrelated, but they are slightly different.

In the above example, the $1000 in your brokerage account is called “margin money”.

Therefore, margin can be defined as the funds you are required or mandated to use as a “good faith deposit” to open a position with your brokerage firm. 

Unlike leverage, margin is expressed in percentage and is inverse to leverage (i.e. 1/Leverage).

For instance, a leverage of 100:1 requires an initial margin deposit of 1 % while a leverage of 25:1 requires a 4% initial margin deposit.

In Uganda, due to the lack of regulation, some brokers offer leverage as high as 2000: 1 because it is to their own advantage, due to the interest on the loan which must be paid whether you make profit or not, as well as the risk you are exposed to. 

Leverage trading exposes you to a larger trading position, but it also amplifies your losses. 

4: Forex Trading in Uganda can be expensive

Forex trading may be expensive.

If the amount required to start a trade is $5, this amounts to 17,919 UGX (Ugandan Shillings). Considering the exchange rates, any substantial amount in the trading balance may be too much for most traders.

For example, on average, most of the traders in developed countries have higher deposits, while in Africa & Asia, the average deposit by traders is much lower in comparison.

Also, you may have to pay other fees for payment methods as most brokers don’t have local bank transfer option for clients in Uganda.

5: Forex brokers don’t have to offer Negative Balance Protection

Negative balance protection is a trading safety mechanism, which makes you not lose more money than what you have in your trading account. This means that you will not be indebted to your broker should the market move against you.

Let’s assume that you deposit $1000 to open a Forex position worth $25,000 with 25:1 leverage.

If there is any crash in the market, your loss will not be above $1000 and you won’t be indebted to your broker.

Forex brokers that accept traders in Uganda may or may not offer Negative balance protection as there is no regulatory requirements for them to do so.

6: You can manage your Risk

While forex trading is risky, losses can be limited and the impact lessened by using risk management tools such as stop-loss orders, market orders and limit orders.

A Stop loss order is a protective mechanism to close a trade when the price of a currency pair moves past a certain price to be determined by you. 

A Market Order is an order you place to enter a trading position immediately, at the prevailing price. However, the execution is guaranteed, but the execution price is not.

A Limit Order is the order you place to get a better entry price. It is an order to trade with a specific price set by you. An automated limit order will buy at a limit price or lower or sell at a limit price or higher.

You could lose all your Capital

Forex trading is enormously risky with the possibility of you losing all your trading capital.
It is highly advisable that you should have good knowledge of the market. Ensure that you trade with a regulated broker. This is very vital since the trade is not regulated in Uganda.

Lastly, due to the risky nature of Forex trading, ensure that you don’t trade with the money set aside for basic things such as house rent, children’s school fees etc. Don’t enter the forex trade with a gambling mindset, as this can be dangerous.
Ensure you trade with only the money you can afford to lose. The amount that would not affect you in case you lose everything. You need a lot of patience and discipline while engaging in the trade.

Business Times

Read more: What you need to know about forex trading

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