So you think you can get into Forex trading?

Outside Looking In
D E Wasake (with a guest writer)

About my guest writer:

Brian Byagaba works with a large multinational financial institution based in Mauritius where he leads the internal audit division. He studied Bachelor of Commerce at Makerere University. The views here are his own and not his employer’s.

About the writer

For over 8 years I have worked with several clients in Uganda, The Bahamas and currently in the United Kingdom in providing audit, tax, accounting and advsiory services. I can work with you any any stage of your investment whether at start up, growth or maturity. You can see the full depth of my experience in Please see my profile

Article Summary

Notwithstanding this being a complex business concept which probably requires sophisticated investors and the “investment manager” the estimated profitability from this sector is Shs. 11m from an initial investment of Shs. 28m hence you can get your capital back (return on capital) in about 2.5 years.

Our “advanced thinking” tips for this sector include ensuring you use an experienced investment manager, setting up a foreign currency account (to shield yourself from the Uganda shilling depreciation) and maybe a bit of luck (or black magic as my guest writer reckons)!

If you are a Ugandan, you have probably heard all about the forex trading that seems to be the hottest business in Uganda. If not, read about it here.

I wanted to invest $10,000 togther with a cousin in a company that I understand is one of the leaders of forex trading.(banange temunkuba with an iron bar when I come I only was going to put in like $1,000 my cousin the rest!) While recently in Uganda this May, I even visited their offices and saw a vast array of computers with lots of graphs and a TV on Bloomberg TV or other business channel (The analysts didnt however appear busy as I would have expected from watching alot of “Wall street” movies). Anyway I returned and was saving. I recently called a good friend in Uganda and casually mentioned the idea to him. He casually replied: “I just invested $2,500 which the Mrs warned me not to put into that company. They have for the second time missed my monthly payments, which are supposed to be 20.4% interest and principle per month!.” He indicated that this company is a ponzi scheme, commonly called a pyramid in Uganda.

So is forex trading the real deal? I set out my observations.

The cons (first of course).
1. Sector unregulated in Uganda

“….Mr Stephen Kaboyo, the director of financial markets at Bank of Uganda equally disregarded the business despite being in charge of currency markets in the country.

“It is not regulated business. It’s really outside our regulatory provision as far as the forex market is concerned,” he said in an interview on Friday. “It’s just like any other business. If you are interested, you go in. If you go there and lose your money, you don’t complain.”
Source: All

As an unregulated sector, this creates a risk especially for the cautious investor(as anyone should be!) especially when for example compared to Switzerland, which seems to be the hub of online trading and has a well regulated sector as per this link.

This of course may not be a major issue for a typical Ugandan as hardly anything is effectively regulated anyway! In Uganda, it would appear many regulations remain on paper and the Bank of Uganda (BOU) director was perhaps just being realistic, its a dog eat dog world.

2. Experience/reputation of traders

The sector has only been recently formed in Uganda and with a myriad of “traders” how does one verify who is “legit” and who is quack. How do you know who is well experienced and who is not. This is compared to the established players like say HSBC who will clearly tell you how the sector is performing. See an example of their investment profile for Exchange Traded Funds(ETFs) which are a financial investment products not too dissimilar to Forex trading.

3. High Starting capital

A good forex trader or investment broker will usually ask you to have starting capital of $10,000. This is because forex trading relies on such tight margins (called “pips“) such that to make you a decent return they need to invest a fair amount of money. At today’s exchange rate, $10,000 is Shs. 28m!

And now the Pros

1. Liquidity. The market is huge. It is the largest type of market in the world and if you open yourself an account say with FX pro with or similar other self traded or managed broker accounts, you will find you can easily buy and sell. Read a summary of the size of the market here.

2.Good returns In the Investment and securities market, I am not sure if there is any other business model giving better liquid returns especially at the moment. Of the website of investment managers I have researched it is not uncommon to find those that give returns typically of 6%. Compare this say to a high saving interest account with Barclays Uganda or Crane Bank which give returns of at most 5%.

An example of a website I see with proper disclosure of returns information is here. You can see that the return for 2010 on a $10k investment was 21.3% but compared to 2011 to date which is now only 3.44%. You should of course know that like any trade in securities, returns are not usually guaranteed and many a trader post losses particularly those who trade for themselves on trading platforms being promoted by so many companies such as this one.

3. Can be easy to deal with Like many investment products such as stocks and other securities, if you have a managed account, then you have a broker handling this for you. Yes they charge fees(check out their fees and compare with others) but this means you don’t have to constantly monitor the position as the brokers do this and will usually send you portfolio statements or even you can view these online and as such can choose to liquidate should you wish.

My guest writer weighs in, his view; it’s a kind of magic!

I like the title, which seems to taunt the reader; do you really think you can get into Forex trading? Admittedly a number of people have answered to this. I’ll limit my view to just the context provided by D E Wasake (DEW) and those within Uganda.

Considering investing in forex does pose several considerations that any wary investor would (and should) make of any investment. A rational person (let’s say you the reader) expects that for an investment a suitable return is earned. Else you pull out the money and take your investment elsewhere; think back to the last time you traded in a car, house or land title. Investing in Forex should be no different, especially in Uganda where you can buy and sell forex across the counter just about anywhere. This though is also where it becomes blurry. How then do local forex bureaux set prices? Well, they look online with their sources of USD, GBP, etc and find the best price on wholesale (large value) deals. In this case the middle man. S/he in turn sources pricing from a larger middle man (or woman) and so on till final customer in another territory just as yourself selling the currency you are looking to buy. With online trading this however happens multiple (read millions of) times per second. Do you really think you would know the best price or time to buy and sell, really? DEW shrugs this off by suggesting a managed account.

Suppose you decide to use a managed account. Notwithstanding the costs per transaction, expense ratio (charged to total value of investment) you are left with very small margins that make sense only with substantial investments (am talking investments over US$100,000). The broker will make money off you whether or not your currency is appreciating. Speaking of appreciation. Unlike assets such as land, shares, etc forex doesn’t have an intrinsic value. Think of a 1,000 shilling note. You value it at 1,000 because of what it can buy; say a loaf of bread. If the same note can only get you half a loaf of bread tomorrow you value it less, and yet the value on the face remains 1,000. By contrast if we swapped the 1,000 with a kilo of sugar. And in today’s market the kilo of sugar can be exchanged for a loaf of bread, when the same kilo of sugar can only get you half a loaf tomorrow you will still have the intrinsic value of the kilo of sugar which can be sold or consumed by you. That to me (although somewhat over simplified) is a fundamental problem the forex trading cannot solve. The value of currencies will only change because of the demand (perceived value) and not the intrinsic value.

As humans we tend to overestimate our abilities; which explains why some people will attempt to manage the forex trading account by themselves and rationalise that by watching Bloomberg/ CNBC (NTV Business Update‼) for an hour a day they are the next Gordon Gekko . If you walk round Kampala Road looking at forex bureaux boards and predicting that currency rates will go up (or down). Think again!!! Currencies are largely hedged by central banks, large corporate organisations, financial institutions and anyone with enough to worry about a small change in price. Professionals sit at trading desks and turn the same bucket of sand (fund investment held) over and over again several times a day; in and out of positions shaking the can for whatever small differences can pile by the side. In fact because of the need to do this faster and faster, humans are being replaced by computers. They will predict (more accurately) and change the same investment through multiple currencies before you can blink twice. Inevitably the exchange rate differences do add up and the pie is shared.

If it is too good to be true, it probably is. I certainly would like to find out how the US$ 10,000 DEW and his comrade invested fairs. But we probably already know. My suggestion; invest in what you know, and understand well. If you have what it takes to read up and learn, all the best. Putting $1 into a black box and pulling out $2 is not wise investment, it is magic!

First the numbers

On the basis of my analysis:

  • Capital investment(A): Shs 28,000,000
  • Revenue per year:(assuming 3.44% interest per month): Shs 11,558,400
  • Profit per year (Assuming investment manager fees of 1% of initial capital) (B) is Shs 11,278,400
  • Return on capital(years to get capital back or A/B) is 2.48 years
Now the basics you must get right before investing.
  • A regulated investment manager/broker is a must.
  • A foreign currency account to shield yourself from forex fluctuations.
  • Returns on investment cannot be guaranteed especially with the current economic climate. Prepare yourself for either a profit or loss.

In today’s world of unpredictability in the securities markets, this appears to be one doing okay irregardless of how the market performs but do your research well and unless you are willing to teach yourself how to be a forex trader (for example at this site) you should seriously consider putting your investment in forex trading through a reputable investment broker/bank who will manage the account for you.

If necessary,open a foreign currency account in one of the Ugandan banks to handle this aspect and deal with a foreign player who is regulated. For example this company and this company are both regulated in the UK by the Financial Services Authority(FSA).There are several scams out there and I dont think its worth investing a significant amount of money in someone who is not tested and tried and doesn’t have quality control mechanisms to protect your money from for example rogue traders or simply inexperienced people.

My guest writer believes this is not an investment to consider. You should give his views serious consideration should you choose to proceed.


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And now the disclaimer: While I have taken steps to research this information as well as based on my experience, you should not rely on the information given here to base your investment decisions. You should seek business advice from a professional knowledgeable of your specific circumstances. I shall therefore not be held responsible for any loss you may incur when acting on this information.