Forex trading is the exchange of currencies to make a profit from fluctuations in the exchange rate. To open a trade, a trader must choose a currency pair, and the direction they expect the exchange rate to move. As the exchange rate between the two currencies changes, the trader can close the trade for a profit or a loss.
More detailed information on how Forex trading works is here. This is a contract between you and your broker to pay any difference in the price of the currency pair between opening and closing your trade. This means that neither you nor your broker need to hold any currency. Other CFDs that you can trade include commodities, metals, equities, energies and many more. When people think of trading, they often think of stock trading and believe Forex trading is almost the same thing.
But this is incorrect. Stock trading is the buying and selling of shares from individual companies. Forex trading is the simultaneous buying and selling of currencies to profit from the change in the exchange rate. A couple of other major differences: The Forex market is a global, decentralised, over-the-counter exchange and all transactions and participants are confidential.
Stock markets are based at a single location and public records are kept of buyers and sellers. Forex trading has a low cost of entry. To make serious profits, stock traders use large amounts of money, which is not an option for traders with limited incomes. Forex trading is not investing. Forex traders never take ownership of the asset being transacted. With Forex trading, the trader is speculating on the future value of a currency pair and to call it an investment would be incorrect.
How do beginners learn to trade Forex? Beginners should learn to trade using a demo account before depositing money into a real trading account. We have a guide full of practical advice to get you started , and more on how to place your first trade. It will take some time to learn how to trade Forex successfully, as traders need to understand the many components and strategies to be profitable.
How to choose the best Forex strategy? There are a huge number of Forex trading strategies, in fact, traders keep coming up with new ones all the time. The best traders will use many strategies and they will know exactly when to use each one. Forex trading strategies will rely on either fundamental analysis analysing economic trends and news events or technical analysis analysing historical price action on charts.
The most popular trading strategies are: Price Action Trading: This is the study of historical changes in currency prices to predict which way the price is going to move next. If you love studying charts and looking for patterns, then price action trading is for you. It relies almost entirely on technical analysis and there are many methods of trading using price action. Range Trading: Range trading relies on figuring out at what point other traders are going to buy or sell a currency. Like price action trading, range trading relies on technical analysis but also needs a good understanding of the currency pair you are trading.
Scalping: Scalping is when a trader opens and closes many trades over the course of a day. The goal is to make lots of small profits. Technical analysis is an important factor with scalping, but the main problem is the time investment required. Scalpers can spend the whole day glued to their trading monitor. Positional Trading: Positional trading is when a trader holds a position, or several positions, over a long period of time — sometimes for week or months or even years.
Positional trading is heavily reliant on fundamental analysis, though technical analysis can be important too. For more detail on analysis and how to use it, we cover strategies and building a trading plan in our learn to trade section. How much do I need to start trading Forex? But how much should you start trading with? The answer depends on how much you can afford and how much risk you are willing to take. Many beginner traders cannot afford to start with a balance of USD, but if you start with an account of USD be aware that it is going to take patience and solid risk management to create a steady income stream.
Beginner traders should start with a minimum account balance between — USD. This allows traders to make small profits, while still maintaining a sensible approach to risk. What is the best time for trading Forex? The more traders are active in the market, the more volatile the market is — and the more volatile the market is, the easier it is to make profits The two cities with the largest financial markets in the world are New York and London, so the best time for Kenyans to trade Forex is the crossover period when both the London and New York financial markets are open.
The two other major markets are the Sydney market and the Tokyo market and trading when these markets are open is also a good approach, though you will have to stay up very late, or get up very early. For more detail on the best times for trading and how daylight savings time affects the major markets, read our piece the best times for trading Forex in Kenya.
Do Forex traders pay tax? Yes, they do. Forex gains are not tax-free income, and all profits are taxable even if your brokerage and capital are overseas. The overall fees would likely be lower with broker B, depending on your trading volume. Forex Lot Sizes The value of your order will depend on the units of a currency traded. Generally these units are referred to as lots.
There are 3 Lot Sizes: Standard Lot - , units Mini Lot - 10, units Micro Lot - 1, units You will see the option to choose the number of lots that you want to trade on the brokers platform. Most brokers allow to trade custom number of lots, for example you can trade 5 Mini Lots, or even 5. Brokers like FxPesa, Exness etc. 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.
It is recommended that you choose the only brokers that are licensed by CMA. Only this will ensure that you are trading forex legally. 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. But it is still a good place to learn trading.
Live this example from FxPesa's website. 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.
For the KYC, it is essential that you submit valid documents as this will prevent any issues during withdrawals. For Address proof, you can submit your phone or any other Utility Bill. 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 like in case of Hotforex. The expert traders can go for ECN type account. These have low fees but commission is charged as per the trading lots. With Zero Account it is 0.
So, 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 Many brokers offer a lot of options when it comes to opening accounts with them.
All these accounts require a minimum account balance. 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.
Trading positions also depend on the lot size that one opts for. One can trade in Standard lots , units , Mini lots 10, units or Micro lots units. 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. The broker offers a leverage of and 0. Generally, the very liquid forex pairs have changes in the range of of pips. So, one can generate a good return if you invest wisely with low leverage.
However, the risk appetite should also be kept in mind. With this method it can generally take upto 24 hours for the broker to credit your trading account. Generally both these methods are instant for funding, and it takes few hours in case of withdrawals. But it takes few days for withdrawals in your bank account.
It is really important to understand the risks, so you can take preventive action to minimize them. In this chapter we will highlight some of the main risks that most traders ignore. Risks of Forex Trading The 4 main risks involved in forex trading are: Forex Market can be highly Volatility Forex deals with exchange rates and currency pairs.
Forex market is quite volatile. As per the global financial markets, the fluctuations in exchange rates could be various economic, geopolitical, social, etc. 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.
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. To safeguard the money invested and to cover oneself from any fraudulent practices, one must always trade with regulated brokers. 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. Here are some tips that Beginner traders should stick to: Always keep track of any Economic news that could affect the currency values. Forex and CFDs are risky products and should be studied well before starting to trade. 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 traders in the financial markets lose money, as losing is one of the aspects of trading.
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