Online Forex Traders in Ghana should Engage with Caution | News Ghana
Forex traders in Ghana shouldn’t be carried away by its popularity and the perceived profits its marketers are talking about.
First, the Bank of Ghana which is the government regulatory body for such activities doesn’t regulate online retail forex trading in Ghana. What this means is that, there are no online forex brokers are regulated by the regulators in Ghana.
The volatility in the forex market occasioned by increase in interest rates by the US Fed Reserve, and the Bank of England, calls for caution among online forex traders in Ghana.
It is also worthy to note that forex trading is an inherent risky venture. On average, most of the forex traders experience losses on their trades. These risks call for introspection among forex traders before opening their trades.
If you are considering forex trading, you should consider these major risks involved before you decide to put your money.
In business, a counterparty is the opposite side of a financial transaction. If you are the buyer, the seller is the counterparty.
Counterparty risk in forex refers to the chances of one party defaulting on its obligation on a trade. As a forex trader, your counterparty is your broker.
In the forex market, there is always the risk that your broker can default on his contractual obligation and that is why they need to be properly regulated by government.
For a Ghanaian online forex trader whose government does not approve of forex trading, this threat becomes more real. You trade with international forex brokers where there is no local protection against risks of counterparty default.
In countries where forex trading is government regulated their brokers are usually regulated by a combination of a Tier 1 regulator meaning regulators from developed nations such as FCA (UK), ASIC (Australia) CFTC (USA) etc., and the host country’s regulator. You will find this information on the broker’s website.
The research by Safe Forex Brokers UK on the forex brokers in the region points that there are 20+ tier-1 regulated forex brokers who accept clients from Ghana & neighboring countries. Many of these brokers are also regulated with FSCA in in South Africa.
However, these brokers are not regulated in Ghana and you have to depend on brokers who are answerable to foreign regulators. This is counterparty risk and recovery of your funds can be difficult in several scenarios such as when:
- Your broker goes bankrupt either due to bad management or other causes
- Your broker was holding a fake or cloned license
- Your broker is involved in arbitration and their accounts are frozen
To manage this risk always conform your broker holds a genuine license by visiting the regulators website and conducting a search to verify their authenticity.
Leverage is the ability to trade with borrowed funds. It’s common in the forex market where traders use a little amount of capital to command larger orders using CFD contracts. The thing about leverage is that you can lose more than the capital you invested.
In leveraged trading you must maintain a margin level of above 100% or you risk a margin call. The higher leverage you use, the more difficult it becomes to sustain your margin level at above 100%
How does this work? A broker might offer a leverage of 1:100 and this means that with a small initial capital of $100, you can command an order of $10,000.
The $100 capital signifies 1% of $10,000 and is referred to as the initial margin required to open a leveraged trade (think of it like collateral). Note that percentage initial margin is (1/leverage) in this case 1/100 = 1%
Some of these foreign forex brokers go as far as offering a leverage of 1:1000 but they don’t do this in developed nations where Tier 1 regulators have limited leverage use.
Example if leverage is 1:1000 and you have $100 equity sitting in your margin account and want to open an order worth $100,000 you must make a compulsory initial margin deposit as collateral of (1/1000) x $10,000 = $10
Margin level % = (Equity/used margin) x 100 = ($100/$10) x 100 = 1,000 %
However if you make a loss of just 0.1% you lose (0.1% x $100,000) = $100
Your new Margin level becomes ($100/ $100) x 100 = 100%
Your margin level has fallen from 1,000% to 100% just because of a 0.1% loss. A major disadvantage of high leverage.
Now note once margin level reaches 100% you will not be allowed to open any more new positions. If you make more losses and your margin level falls to 50% (this level varies for brokers) you receive a margin call to deposit more funds.
However if your margin level falls below 25%, all your open positions will be closed meaning any currency you bought will be sold off and the money used to repay your debt. You will record a loss because your broker can sell off your currency at a price lower than what you bought it for.
The gap risk is the probability that the price of a currency pair will fall drastically away from the previous closing price. Example EUR/USD closed at 1.07 yesterday and opened at 1.02 this morning even when trading didn’t occur.
Gapping is common during the weekend pause in trade since forex trading is carried out five days in a week and is more common during high market volatility.
During high volatility, gapping also affects stop-loss orders. The price of a currency pair can gap past the stop price you set, and your stop loss is triggered at a different price.
Imagine USD/EUR current exchange rate is 1.1545 and you set your stop loss order at 1.1540. The order will only be executed if the USD/EUR price falls below 1.1540. However, if the price of USD/EUR gaps past 1.1540 and opens at 1.1200, your position will be closed at 1.1200 creating additional loss for you.
Copy Trading Risk
Copy trading is when you mimic trades executed by other master traders. Copy trading can either be manual when you are sent signals to execute, or automatic when you link your account to the master trader to give him full control.
Tier 1 regulators like the UKs FCA views automatic copy trading as portfolio management and require master traders to fulfill regulatory obligations. The point is that copy trading is sensitive and copying just anybody can result in losses which be hard to recoup especially as retail forex trading isn’t regulated in Ghana.
Most copy trading platforms require some form of subscription and where they don’t, the spreads and fees are usually higher than with regular trading.
Copy trading does not encourage diversification because master traders specialize in specific currency pairs. When you invest heavily in one master trader you risk losing all your capital when that currency pair underperforms.
Finally, copy-trading can create a conflict of interest between the follower and the master trader. While the follower is interested in making an instant return or profit,…