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What Zimbabweans must know about Retail Forex Trading

by Staff writer
06 Mar 2021 at 05:21hrs | Views
The forex market is the largest financial market in the world surpassing even the global stock markets. The BIS triennial survey of 2019 states that the global forex market generates nearly 6.6 trillion per day.

This is nearly a 30% jump from the amount generated back in 2016. It is estimated that the forex market is set to witness a 6-10% more growth in the next 5 years.

Forex Brokers SA in their recent report said "The African community has an estimated 1.8 million traders who trade on the forex market. Majority of the traders are from the regions of South Africa, Nigeria and Kenya."

The reason why these countries have thriving financial markets is due to the local market regulators like FSCA and the CMA and their active role in bringing regulations and protecting its traders. These countries have legalized speculative instruments like - OTC derivatives market and forex trading industry and this has achieved lot of success in growth of investments and participants and has also safeguard the interest of investors.

Seeing the successful model of these regulators' countries like Ghana, Nigeria, Tanzania have started implementing plans to have their own retail forex trading regulations to protect traders & investors in their countries.

With enactment of forex regulations in different countries, the African continent will definitely have positive impact on the industry and traders.

Here we look at what forex market is, why is it popular among retail investors, its risks, rules & regulations on forex market and online forex trading.

What is forex market, why is it so important? And who trades forex?

We are in a day and age where most of all our transactions are done across international borders. We are able to conduct business across borders because of the existence of the forex market.

Without the forex market, it would be not be possible to determine value of one currency versus another currency. If we don't know the value of currencies then we cannot do any foreign trade or business.

For example, imagine fruits are being imported from the US, how will you know what price to pay for them in your local currency? There has to be some way through which you will compare your country's currency with the US currency.

Forex market comes into play here, where the value of one currency is decided against the other major currencies like US dollar based on market forces. It's based on the value of the currency derived from the forex market that global trade is conducted worldwide.

Forex market has different participants who contribute to currency demand and supply. According to the Euromoney FX Survey 2019, a 40% share of the global Forex market is held by five companies who are mainly banks. Apart from that, there are many other market players who trade in the forex market like Hedge funds, Central Banks, Multinational Corporations etc.

The forex market also constitutes retail participants who account for 5%, and they trade in it solely for the purpose of speculation.

How does retail forex trading happen? How and why do retail traders trade in forex market?

Forex trading is nothing but selling one currency against another currency. All the trades are done in pairs where one currency is the base currency and the other currency is the quote currency.

For example, if you wish to trade in the US dollar and the Euro then US dollars is the base currency and Euro is the quote currency and if USD/EUR is trading at 1.28156, then one dollar is worth 1.28156 euros.

There are Major pairs and Minor pairs. Major pairs dominate 67.4% of the Forex market's daily market share. The major currency pairs are USD/EUR, USD/JPY, USD/GBP, USD/AUD, USD/CAD, USD/CNY, and USD/CHF.

The price of the currencies normally changes every second based on market forces & these have the highest liquidity. There are many reasons for price fluctuation and market volatility, but some of the main reasons are political stability, interest rate, terms of trade etc.

Currently 5.5% of the traders within the forex market trade in retail forex. Retail players trade currencies based on 'Speculation'. Speculation is when a trader buys a currency for cheap expecting to sell it at a higher price in the future. The decision to speculate is based on many factors but it's often time very risky as the gamble might not pay off.

With Brokers offering OTC instruments, its fairly easy to enter the retail forex trading. Retail traders often enter retail forex mainly due to its high leverage, low barriers to entry and ease of access.  With the market functioning for 24 hours 5 days a week, traders can open & close orders easily due to higher market liquidity.

Retail traders or Speculators spend hours of research before deciding to buy or sell a currency. This aspect of the forex market is called retail forex trading when retail trades are involved.

For example, if there's news that US is releasing a new vaccine that can cure cancer, a speculator will buy US dollar today as much as he can expecting to sell the US dollar at a higher price in the future after the vaccine is released. However, this is highly risky as there's no surety as to what might happen in the future, a speculator makes a gamble hoping it will pay off.

What are the Risks of Retail Forex Trading?

Leverage & Margin trading Risk: One of the biggest reasons why retail forex trading is flourishing is mainly due to its low investment requirements by brokers and comparably high returns possible.

Traders often have to invest small amounts of money to get high rate of return based on the leverage the brokers offer the trader. But what many traders are not aware is that there's a high possibility that you might lose more money than you invest.

For example, you invest $200 & use 1:100 leverage to buy a currency pair. The 1:100 leverage allows you to buy $20,000 worth currency pairs. If the price goes up from the price you bought it at then you can make money but if the price drops then you'll be liable to pay up to $20,000 which is much more than the money you invested.

Volatility: There are various factors that affect the volatility of the market, even the most experienced traders lay low during high volatile periods since one trade can make you lose all your profits and investment.

Scams & Malpractices by brokers: Due to the nature of the forex market and how it functions, brokers always use Ponzi schemes to trick traders into making trades which offer high returns.

There are many unregulated brokers that function in Africa without any license and traders are not aware of this, if there's a dispute then the trader cannot approach local authorities for relief.

Importance of Safe trading practices and Risk Management in retail forex trading: One of the most common advices given to first time investors in the forex market is that one should enter the forex market only if they have money to lose. Due to the highly unpredictable nature of the market, it's very hard to find stability. But there are ways in which you can ensure that you trade safely and smartly:

1.    You can use stop loss methods to ensure that you don't lose all your funds at once.
2.    Trade with lower leverage of less than 1:5.
3.    Don't trade for more than a couple of hours in a day.
4.    Only trade once you have gained enough professional experience.

Is Retail forex trading legalized? What are the Rules & Regulations governing forex markets and online trading?

Retail Forex trading is a common practice around the world and most countries have their own regulators to govern trading activities within their country. It's legalised in most developed countries as CFD or leveraged instrument. Most regulators lay heavy restrictions on leverage levels that brokers offer to traders to ensure that traders don't incur heavy loses. And there are also strict reporting requirements for brokers to ensure safety of investors.

Currently there are only two countries in Africa, South Africa and Kenya, which has legalised forex trading and have their own regulators FSCA and the CMA. More countries are planning to adopt policies from these countries to set up their own regulatory bodies.

In Zimbabwe, Reserve Bank of Zimbabwe set rules for forex dealings. There is restriction on all forex trade and exchange controls in Zimbabwe - to control currency supply and inflation in economy.

Zimbabwe does not have their dedicated regulatory body for regulation & monitoring of retail forex trading like South Africa or Kenya. All matters with reference to forex trading is regulated by the RBZ. The RBZ forbids traders from trading (buying/selling currency) with any unauthorised dealers as it may attract heavy penalties under SI 212/19 and 213/19.

The three most important rules are that:

1.    The RBZ forbids users from holding onto foreign currencies for more than 30 days if they have obtained it.

2.    RBZ under S.I 212/20 has barred local vendors from accepting foreign currencies as payment for goods or services. Anyone in violation of this will be given civil penalty.

3.    Members of the public are required to use these licensed institutions like banks, for buying and selling foreign exchange through formal channels.

Other than above restrictions, there is no direct legislation in place on retail online forex trading in Zimbabwe which directs retail traders and governs them. And no local brokers are regulated for retail forex trading. The foreign exchange control rules issued by RBZ are the only rules that exist.

All traders who intend to trade forex online must obey these rules and ensure that they follow them in their foreign currency dealings required for deposits at brokers abroad or funds held at brokers for longer than 30 days.

Traders need to properly understand the rules set by RBZ before trading so they are not in violation of any forex rules.

Since they are no locally licensed forex brokers in Zimbabwe. Traders must be extra careful while selecting an online broker to trade forex by ensuring that their forex broker is licensed with FSCA in Africa or other foreign top-tier authorities like FCA or CySEC to ensure the safety and security for their investments.

Remember:

The forex market like any other market is risky since not one but many factors affect the prices of currencies. No one can properly & accurately predict as to how a market would change in the future.

So, only invest if financial markets once you have gained enough experience. Start off by trading on a demo account and only trade with real money if you are profitable over a period.

Learn about risk management & never invest any capital that you cannot afford to lose.

Source - Byo24News

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