The 5 Pitfalls of Forex Trading in Kenya 

The Kenyan shilling floats on the global forex market and both citizens and non-residents are allowed to buy or sell foreign exchange through authorised dealers,

In August 2017, the Capital Markets Authority (CMA) of Kenya established a legal regulatory framework to incorporate online forex trading, making Kenya the second African government to fully authorise currency trading. 

The CMA allows forex brokers in Kenya to offer leverage of up to 1:400 limited to transactions of $10,000 or less. 

Since 2017, forex trading has significantly grown in Kenya. Nonetheless, there are still some pitfalls to forex trading in Kenya. This article will explore five forex trading pitfalls in Kenya.

Choosing the Wrong Forex Broker

First, what is a forex broker? This is a financial services company that offers traders access to a buying and selling platform. For you to trade foreign currencies, you need to go through a forex broker.

The choice of a forex broker is one of the potential pitfalls of forex trading. There are dozens of forex brokers in Kenya. Different brokers have different ways of trading; hence, you have to pick the one that works for you.

Here are some of the things you should look out for before settling on a forex broker.

• Compare trading costs: Trading costs vary significantly from broker to broker. These costs include spreads, commissions, and other fees. Make sure you compare these costs and settle for a broker who offers competitive pricing.
• Test the trading platform: The proliferation of trading platforms in Kenya has increased competition between forex brokers. Hence, every broker is tooting their horn as being the best. By just consuming the marketing material, you might end up with a skewed understanding of the broker. Therefore, you must test the trading platforms. Most of the platforms have a trial period, make sure you thoroughly test a platform before subscribing to it. Ensure the platform is user-friendly and offers the tools and features you need.
• Customer support: Customer support is key when it comes to a trading platform, especially if you are a beginner trader. You want to choose a forex broker whose customer support is responsive and helpful.
• Read the fine print: Do not assume the fine print. Read the terms and conditions and understand them. Where they use technical terms, do your research to know what they mean. Furthermore, pay attention to any restrictions outlined, hidden fees, and anything else that is worth noting.

Poor Strategy

Now that you have settled on a forex broker and have access to a trading platform, the next pitfall you need to pay attention to is the poor strategy pitfall.

Forex trading requires a sound strategy that stipulates how you will trade, what you will trade, the indicators to look out for, and much more. A good strategy is the difference between making losses and making profits.

Some of the poor strategies to look out for include,

Overtrading

Overtrading opens you up to many risks that you cannot mitigate. A good strategy takes into account how many positions you can have, and for how long. Overtrading is a panic strategy where you are trying to cling to every straw at your disposal.  

Overtrading can also manifest in the following ways: 

• Increasing leverage beyond reasonable limits, hoping for a strikeout, 
• Increasing lot size as a way of increasing potential earnings, 
• Increasing the frequency of trades to have as many transactions as possible 
• Diversifying your trades until you are spread too thin.

Copying Strategy

There are hundreds of people online touting their trading strategies as the answer to all. They promise that once you buy their strategy, you will make a fortune without having to break a sweat. 

The reasoning behind such propositions is questionable. If one has such a foolproof strategy, why sell it for a few shillings or dollars instead of using it to mint the millions the strategy can mint?

This is a pitfall that many beginners fall into.

The second part of this pitfall is that you need a strategy that works for you. If you copy-paste a strategy and it fails, you have no way of interrogating it. It is advisable to build your strategy so that you can tweak it and adapt it, keeping in mind that the market is always dynamic and will need you to make adjustments all the time for your strategy to win.

Lack of Regulation

Another potential pitfall of forex trading in Kenya is the lack of regulation. While forex trading is not illegal in Kenya, it is not highly regulated. The Capital Markets Authority (CMA), the body that regulates the capital markets, regulates forex trading.

Nonetheless, many people have been taken advantage of by malicious organisations posing as forex brokers. They oversell their forex brokerage, promising high, consistent returns, only to end up defrauding the traders.

A case in point was the VIP Portal scandal, where the brokerage firm swindled over 13,000 people and Ksh1.08 billion.

Ensure that the trading platform you choose is regulated by the CMA. If the platform is international, check that it is regulated by tier-1 regulators such as the UK's Financial Conduct Authority (FCA) or Australia’s Australian Securities and Investments Commission (ASIC).

Market Volatility

The forex market is subject to a lot of volatility. This is because there are many factors affecting the value of a foreign currency, including geopolitics, war, supply, and demand, among others. 

A lack of understanding of market volatility can be a significant pitfall in forex trading. 

Market volatility essentially means the fluctuations that are happening in the market. To understand volatility, you can use moving averages, Bollinger bands, and/or the average true range.

• Moving averages: average movement of the market for a specified time.
• Bollinger bands: These are two lines plotted with two standard deviation points above and below the moving averages for a specified time.
• Average true range: average trading range of the market for a specified time.

The higher the volatility, the higher the potential returns; however, the higher the risk.

Lack of Trading Discipline

Discipline is key in trading. Trading is a game of risk; hence, you want to have factored in all the variables before committing to a trade. By properly analysing a trade, you will be able to set up your position properly. 

However, sometimes emotions get in the way and you are tempted to either pull out before the trade matures or stay longer than initially planned. These emotional decisions can lead to massive losses. Hence, you have to be disciplined to stick with your strategy. 

It is only by sticking with your strategy for long enough that you will know if it works or not, and if not, what are the shortcomings of the strategy? 

Wrapping Up

Forex trading can be a lucrative venture, however, it is a high-risk and high-reward endeavour. Beyond the risk lie some pitfalls that can lead to you losing your money easily. You have to ensure that you have chosen the right broker who is regulated. Come up with a strategy that works for you and stay disciplined to see it through. Finally, understand market volatility for that is how you make your money.