Foreign exchange trading (forex), which entails the exchange of currencies between countries, is steadily growing as a global economic market. It is possible to engage in forex from any country, including in Kenya, where forex is gaining traction among investors.
Profit in forex depends on knowledge of forex mechanics and correct application of strategies, but most essentially on "disassembling" patterns in forex charts.
This article explores the fundamentals of forex trading and provides insights into leveraging market patterns for sustainable gains in Kenya, referencing the latest expert analyses.
What is forex trading?
If you want an answer to the question 'what is forex trading and how does it work', you should firstly read this article and then do some research. At the core, currency trading (forex) is the selling and buying of currencies to profit from currency exchange rate movement.
Forex is the most liquid financial market in the world, with an average daily turnover of more than $7 trillion, and it dwarfs the daily turnover of the stock and bond market, respectively.
Kenyan traders are drawn to its simplicity because they can trade on the various trading platforms using just a smartphone.
Trading takes place in currency pairs, for example USD/KES (US Dollar/Kenyan Shilling). Profits are made by fluctuations in price, such as when a trader buys USD/KES at an exchange rate of KSh 120 and sells USD/KES at an exchange rate of KSh 122, the trader makes KSh 2 for every dollar of currency in the transaction.
This is how forex trading works
In contrast to central stock exchanges, forex market trading is broken across a 24/5 cycle around the major financial centres such as London, Tokyo, New York, which is not time bounded. Key factors influencing exchange rates include:-
Economic data: GDP, inflation, and employment statistics.
Geopolitical events: Wars, elections, or trade agreements.
Monetary policies: Central banks. For example, the Central Bank of Kenya (CBK) can affect the exchange rates within the currency exchange by varying the interest rate policy or participating in FX markets.
Kenyan businessmen and women ought to take these factors into account, as they are quite relevant to the power of the Kenyan shilling relative to foreign currencies, such as the us dollar and the euro.
Mastering forex chart patterns for success
Interpretation of chart patterns, a graphical representation of the historical buying and selling price movements, is a strategy that can be employed to predict future price movements and trend, which is one of the ultimate goals of profitable forex trading. These patterns fall into two main categories:
1. Reversal patterns
Reversal patterns are an indicator of the direction of the market cycle to come. Common types include:
Double tops/bottoms: Double top is a trading slang, explained as a price going through and break at a resistance level, that is, a price falling after a bearish reversal. Conversely, double bottoms suggest bullish reversals.
Head and shoulders: This type of pattern is a market pattern of dying stock which is generally a harbinger of an uptrend being reversed.
2. Continuation patterns
Continuation patterns suggest that the ongoing pattern will continue. For instance:
Pennants and triangles: These are measured during short periods of consolidation with subsequent price reversal to the opposite direction.
Wedge patterns: Falling wedges tend to produce upward price reversals, and rising wedges tend to produce downward price reversals.
Learning the psychological correlations to these patterns, for example the trader's resistance to change a specific price point, improves the utility of the patterns.
For Kenyan traders, practicing identifying these patterns can be achieved by leveraging demo accounts provided by the exchange platforms, as it reduces the number of losses experienced while learning.
Is forex trading profitable?
The forex yield is huge, but nobody can make a profit for certain. A viable route to probability is based on a strong investment plan, risk management, and utilization of historical market data.
Historical data in forex
Kenyan traders are also able to leverage historical data to determine trade prospects - a strategy of borrowing in low-interest currency and investing in high-yield currency.
In one case, lending Japanese yen to arbitrage against Kenyan shillings, which generally appreciate more quickly in terms of values, could be beneficial if exchange rate movements fall within an acceptable range.
Risk and reward
Risk management is crucial. As experts have said, the most that trading capital per trade should be a 1-2% risk. Such applications, as stop-loss orders, automatically execute trades when the loss of an executed trade exceeds a pre-set upper limit, thus avoiding disaster.
Kenya’s growing forex market
The forex market in Kenya is growing, supported by the growing access to the internet and by the growth of mobile money services such as M-Pesa. Regulatory control by the Capital Markets Authority (CMA) of traders protects investors.
Local traders experience localised kind of challenges e.g., currency instability caused by the fact that Kenya largely depends on imported goods and imports/volatility of foreign direct investment.
For example, the Kenyan shilling recently hit a record low exchange rate of more than KSh 150 per US dollar and raised apprehensions regarding the potential for inflation and prices of imported goods to become more expensive. That difference implicates the utility of rapid market appraisal and responsive trading tactics.
Conclusion: Path to sustainable forex success
Forex trading offers a lucrative avenue for Kenyan investors to grow their wealth, but it demands skill, discipline, and continuous learning. Mastering forex chart patterns, using effective risk management techniques, and being aware of how the market functions can unleash the power of this global market.
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