What traders in the UAE should know before they start trading Forex
Forex trading is a popular trading activity across the globe, due to which there is a lot of information freely available on this vertical. The issue is, not much of this information is targeted at UAE traders and this is important because the broker you choose can matter.
As a trader in one of the UAE emirates such as Dubai, Abu Dhabi or Sharjah, there are a few considerations to know before choosing a broker that doesn’t apply for traders in other countries.
We look at what some of these considerations are to help ensure you pick the right broker before you start trading.
First of all, before you start trading, you should choose a broker who has been regulated by the financial authorities of the UAE. Using a broker regulated in the UAE ensures the broker is legally allowed to offer their services to UAE residents and that the broker meets the financial standards expected in the region.
As a client, regulators provide protection in a number of ways. Protective measures include monitoring of the broker’s financial records; this ensures transparent and therefore honest trading operations. Regulators also require the broker to keep client funds segregated and to document processes for recourse in event of a dispute.
In the UAE you can choose from four regulators, these are:
- The Dubai Financial Services Authority (DFSA)
- The Abu Dhabi Global Market (ADGM)
- The Securities Commission Authority (SCA).
- Some forex brokers in the UAE are regulated by the Central Bank of UAE (CBUAE). For now, these brokers are an option but they will need to transition to SCA regulation by July 2022.
For safe trading in the UAE, choose a broker regulated by DFSA, ADGM, SCA or CBUAE.
The CBUA or SCA regulate mainland companies, which are companies that need to be majority-owned by a UAE national. The DFSA and ADGM regulate the brokers in the free financial zones in the UAE, which allow companies that are owned by foreign nationals to be located. While all regulators in the UAE have the same basic regulatory requirements, the regulators of the free financial zone maintain a level of autonomy so there are differences to be aware of.
The main difference is that mainland regulators require brokers to be 100% sharia compliant. ADGM and DFSA do not require the broker they regulate to be sharia compliant.
This means brokers with CBUA or SCA regulations cannot offer swap fees. Swap fees, sometimes called rolling fees or overnight charges, are interest rates and bonuses that are not permitted within sharia law. DFSA and ADGM regulated brokers may have a swap-free account, however, this does not necessarily make the trading account sharia compliant as the interest rate can be charged in another form such as through an administration fee.
So if you want to be sure your trading account is sharia compliant, choose a broker regulated by CBUAE or SCA.
Trading on margin or leverage is a useful tool to help increase your profits. While forex prices are frequently changing at rapid speed, they tend to only change by small amounts unless there is a major economic or political event. For this reason, leverage is useful especially for retail traders who do not have access to the large volumes of cash that fund managers do.
The thing to be aware of when using leverage is that while it can lead to large profit when movements go in your favour, they can also lead to crippling losses if price movements go the wrong way. For this reason many regulators around the world limit the leverage brokers can offer.
Much like European and Australian regulators, the DFSA and ADGM limit leverage to 30:1 for major currency pairs and 20:1 for minor and exotics. They also allow higher leverage for professional traders who meet certain requirements. The CBUAE and SCA however don’t place a limit on leverage. So some brokers with one of these regulators may offer leverage of 500:1 or higher.
In summary, if you want the highest possible leverage when forex trading, choose a CBUAE or SCA regulated broker. For most traders, 30:1 leverage is enough.
When choosing a broker, it helps to know the spreads you are trading with. Justin Grossbard and Noam Korbl founded the website ‘Compare Forex Brokers’ because they were frustrated trying to figure out which broker offered the best value when it came to costs. For this reason, they created a spreads module that compares the average spreads of forex brokers.
The website contains a section for UAE traders to see how spreads compare for brokers in the UAE region. Remember, lower spreads generally mean lower costs but you also need to keep commission costs in mind. To this end, 3 modules are available, one that compares no commission accounts, a second one on commission or ECN style trading accounts and a third module on fixed spread account comparison.
There is a wealth of information on the web for forex trading, however, a lot of it is not particular to traders in the UAE. If you are trading in the UAE, you should make sure you research brokers regulated in the UAE. This ensures the broker is authorised to offer their services to you and that you are getting the right information about the broker and the trading conditions you will experience as a trader in the UAE.
Justin completed a Batchelor Of Commerce and masters degree and has worked with the Forex industry for 7 years.