Forex traders in Ghana should not be carried away by its popularity and the perceived profits spoken of by its traders.
First, the Bank of Ghana, which is the government regulator of these activities, does not regulate online retail forex trading in Ghana. This means that there are no online forex brokers regulated by regulators in Ghana.
The volatility in the foreign exchange market occasioned by the increase in interest rates by the US Federal Reserve and the Bank of England, calls for caution among online forex traders in Ghana.
It should also be noted that forex trading is an inherently risky business. On average, most forex traders experience losses on their trades. These risks call for introspection among traders before opening their trades.
If you are considering trading forex, you should consider these major risks before deciding where to invest 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 a party defaulting on its obligation on a transaction. As a forex trader, your counterparty is your broker.
In the forex market, there is always the risk that your broker may default on their contractual obligation and that is why they must be properly regulated by the government.
For a Ghanaian online forex trader whose government does not approve forex trading, this threat becomes more real. You are trading with international forex brokers where there is no local protection against counterparty default risks.
In countries where forex trading is regulated by the government, their brokers are usually regulated by a combination of a Tier 1 regulator, i.e. regulators from developed countries such as FCA (UK), ASIC (Australia) CFTC (USA), etc., and the host country regulator. You can find this information on the broker’s website.
Search by Safe Forex Brokers in UK on forex brokers in the region indicates that there are over 20 Tier 1 regulated forex brokers that accept clients from Ghana and neighboring countries. Many of these brokers are also regulated by the FSCA in South Africa.
However, these brokers are unregulated in Ghana and you have to depend on brokers who are accountable to overseas regulators. This is a counterparty risk and recovering your funds can be difficult in several scenarios, for example when:
- Your broker goes bankrupt due to mismanagement or other causes
- Your broker held a fake or cloned license
- Your broker is involved in an arbitration and his accounts are frozen
To manage this risk, always make sure your broker has a genuine license by visiting the regulators website and doing a search to verify their authenticity.
Leverage is the ability to trade with borrowed funds. This is common in the forex market where traders use a small amount of capital to order larger orders using CFD contracts. The problem with leverage is that you can lose more than the capital you have invested.
In leveraged trading, you must maintain a margin level above 100% or you risk a margin call. The more leverage you use, the harder it becomes to keep your margin level above 100%
How does this work? A broker may offer leverage of 1:100 and that means with a small initial capital of $100 you can place an order of $10,000.
The $100 capital is 1% of $10,000 and is called the initial margin required to open a leveraged trade (think of it as collateral). Note that the initial margin percentage is (1/leverage) in this case 1/100 = 1%
Some of these foreign forex brokers go so far as to offer leverage of 1:1000, but they do not in developed countries where Tier 1 regulators have limited use of leverage.
Example if the leverage is 1:1000 and you have $100 of equity in your margin account and you want to open an order worth $100,000, you need to make an initial margin deposit mandatory as collateral of (1/1,000) x $10,000 = $10
Margin Level % = (Equity/Margin Used) x 100 = ($100/$10) x 100 = 1000%
However, if you make a loss of only 0.1%, you lose (0.1% x $100,000) = $100
Your new margin level becomes ($100/$100) x 100 = 100%
Your margin level went from 1000% to 100% just because of a loss of 0.1%. A major disadvantage of high leverage.
Now note that once the margin level reaches 100%, you will not be allowed to open any new positions. If you make more losses and your margin level drops to 50% (this level varies between brokers), you receive a margin call to deposit more funds.
However, if your margin level falls below 25%, all of your open positions will be closed, meaning any currency you have purchased will be sold and the money will be used to pay off your debt. You will incur a loss because your broker may resell your currency for less than you bought it for.
Gap risk is the probability that the price of a currency pair will fall dramatically from the previous closing price. Example EUR/USD closed at 1.07 yesterday and opened at 1.02 this morning even without trading.
The spread is common during the weekend break in trading since forex trading is done five days a week and is more common during high market volatility.
In times of high volatility, gapping also affects stop-loss orders. The price of a currency pair may exceed the stop price you set, and your stop loss is triggered at a different price.
Imagine that the current USD/EUR 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 rises above 1.1540 and opens at 1.1200, your position will be closed at 1.1200, creating an additional loss for you.
Copy trading risk
Copy trading involves imitating trades executed by other master traders. Copy trading can be either manual when you receive execution signals or automatic when you link your account to the master trader to give them full control.
Tier 1 regulators like the UK FCA considers auto-copy trading as portfolio management and require master traders to fulfill their regulatory obligations. The fact is that copy trading is sensitive and copying anyone can lead to losses that are hard to recoup, especially since retail forex trading is unregulated in Ghana.
Most copy trading platforms require some form of subscription and where they don’t 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 a lead trader, you risk losing all of 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, that may not be the master trader’s plan. He could decide to hold assets for the long term, regardless of the losses.
Some copy trading platforms pay master traders based on their win rate, so some masters might be manipulative. They could place stop orders well below the current price to avoid losing consistently. This is good for them but bad for you as it means you incur huge losses if your stop loss is triggered.
All of these risks prevent an online forex trader from using copy-trading as a strategy. Hence the call for caution.
Exposure to false signal scams
Many people and organizations claim to have information that will allow traders to increase their trading profits.
These people usually charge a weekly or monthly subscription for their services. Essentially very few are genuine and most of them are just sending you random signals
As a novice online forex trader, you are more likely to fall for these scams because they pose as genuine. Some go so far as to post screenshots or testimonials of others who have had success with their services.
Exposure to butcher the pig scams
The pig slaughter scam is a trust based scam. Here the scammer first tries to build trust in most cases by engaging in a romantic relationship (pig farming) and later informing you of the profits he has made from his investment or to its forex trading platform.
During your first investment, the scammer allows you to withdraw a sum of the profit. This pushes you to invest more (fatten your account) huge sums in the scam forex trading platform.
By doing so, the scammer deactivates the trading platform and takes your money (massacre). The US Embassy in Ghana has issued a warning about romance scams. According to the embassy, scammers pretend to be US citizens living in Ghana and establish a relationship with you online.
Many Ghanaians believe that online forex trading is the elixir of poverty and the struggle of 9 to 5 jobs. However, online forex trading is a vast ocean filled with sharks masquerading as various forms. The risks in forex trading are many and require understanding before starting the business.
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