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Beyond the hype: Pitfalls to watch out for as a newbie forex trader
True risk management involves more than just limiting how much money is placed on any one trade, it is about understanding how to balance risk and reward over time and being prepared for sudden losses.
The currency trading market has become vibrant because it offers flexibility for those eager to trade across time zones without constraints. Its decentralised structure has attracted a diverse range of investors.
But forex trading, where you exchange one currency for another in the hopes of turning a profit, is a market with global reach and potential, yet also carries substantial risk.
Michael Karago, the CEO of Trade Edge, a financial markets company, says one of the important issues in the forex industry lies in how it is perceived.
“The biggest challenge that we have is how forex was introduced into the market,” he says. “The whole concept was not introduced as a business. Unfortunately, it was introduced more as a get-rich-quick scheme.”
This misconception, he explains, has led many to enter the forex world without adequate preparation or understanding of the required skills.
For the uninitiated, it is easy to fall into the trap of thinking forex trading is as simple as placing bets. Mr Karago insists that forex trading is, in fact, a business requiring resources, psychological endurance, and continuous learning.
“In business, the most important thing is resources. Without resources, you will never make it in whichever business,” he says.
To succeed, novices should focus on building a solid foundation of knowledge and approach the forex market strategically rather than impulsively.
Rufus Kamau, another expert who is a Research and Market Analyst at FX Pesa says in any industry where there is a lot of money moving around, it attracts a lot of bad actors, all the more reason why it is important to know the difference between informed trading and sheer gambling.
Volatility, uncertainty, and mental fortitude
Forex trading is inherently volatile, and the market can swing wildly based on factors that even seasoned traders cannot foresee.
Mr Karago highlights the unpredictability pointing to external factors like the US elections which will be happening today (November 5, 2024) and other global political events that may heavily influence currency prices.
“Somebody should be prepared for breaking news,” he says.
Beyond the external risks, traders are also contending with technological vulnerabilities. “We are dealing with systems, and systems have errors,” Mr Karago says.
System errors can result in financial losses, which only a strong understanding and appropriate risk management can mitigate. Mr Karago says that without this knowledge, beginners risk losing all their capital.
On the same, Mr Kamau advises beginners to take time to understand the intricacies of forex trading.
Investing in education is important, with the first step involving a deep dive into economic indicators like central bank policies and non-farm payroll data factors that impact currency values.
Scams and the role of regulation
The appeal of quick profits has unfortunately led to a proliferation of scams in the forex world. Mr Karago quickly clarifies that while reputable brokerage firms operate within the law, “There are some intermediaries between you and the broker.”
These intermediaries, often posing as mentors or trainers, may solicit money from unsuspecting traders. “It is unfortunate that investors are not aware,” he says, “if I want to invest, I don’t want to trade, but I want to invest, which should be the right process.”
The trade experts warn against giving funds or login credentials to anyone, because it is both illegal and contrary to proper trading procedures.
Additionally, Mr Kamau acknowledges that regulatory advancements, like the involvement of Kenya’s Capital Markets Authority (CMA), have been instrumental in creating a safer environment for traders.
“The industry has really matured,” he says, but he cautions that beginners still need to discern legitimate opportunities from deceptive promises.
For added security, Mr Karago advises against working with companies that lack local regulation.
“I really discourage investing in companies that are not regulated in Kenya,” he says, explaining that in the event of a system error, only companies regulated within the country offer recourse through local authorities.
Risk management, a necessity, not an option
A key tenet that both trade experts emphasise is risk management. Mr Karago says that many beginners mistakenly think of risk management as a simple concept, failing to recognise its complexity.
True risk management involves more than just limiting how much money is placed on any one trade, it is about understanding how to balance risk and reward over time and being prepared for sudden losses.
As Mr Karago puts it, “People think it’s just about learning risk management, but there is more to it.”
Start with a demo account
Consequently, Mr Kamau suggests that new traders begin their journey on a demo account to practice without risking real funds. This training phase, he explains, is essential in developing the discipline to adhere to a trading plan.
“The next stage is now learning the discipline, the risk management, and all that,” he says, recommending that new traders start with a modest amount of capital until they have mastered these skills.
In addition to market and operational risks, trading involves a range of fees that beginners often overlook.
“A broker is somebody who doesn’t have a product. Basically, they just link the buyer and the seller, meaning they earn through commission,” Mr Karago says.
He warns that some brokers charge abnormally high commissions, which can eat into a trader’s profits.
Mind the charges
Mr Karago also mentions the potential impact of exchange rates on deposits. When converting funds into a foreign currency, typically USD for forex accounts the cost of that conversion affects the amount available for trading. "If you deposit, it’s subjected to exchange rates,” he says.
Traders should be aware of these charges when planning their investments.
Developing a trading strategy
Mr Kamau says that to be successful in forex trading, it is essential to have a systematic approach. Beginners should spend time studying the market and building a structured strategy before risking actual money.
This process involves learning technical analysis and understanding macroeconomic influences. “when well equipped, If you are just waking up and looking for a trading opportunity, whether you are trading on a demo account or a live account, you will know exactly what to be looking for the day.”
With patience, knowledge, and a sound trading plan, newcomers can navigate the forex market’s many challenges. The experts reveal that trading is not a game of chance but a disciplined venture requiring ongoing education, market analysis, and strategic thinking.
