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CFD Trading In Botswana

Written By

Paul Holmes

Written By

Paul Holmes

Paul has over 14 years experience in the trading industry, both as a full-time trader and working with leading brokers. He’s traded indices and forex, developed proprietary day trading techniques, and built his own MetaTrader algorithms. He excels at delivering simple-to-follow guides for beginners to experienced traders.  

» Paul Holmes Profile Page

Edited By

James Barra

Edited By

James Barra

James is an investment writer with a background in financial services. As a former management consultant, he has worked on major operational transformation programmes at prominent European banks. James authors, edits and fact-checks content for a series of investing websites.

» James Barra Profile Page

Fact Checked By

Michael MacKenzie

Fact Checked By

Michael MacKenzie

Michael is a writer and editor with over a decade in journalism and publishing. His niche lies in editing and fact-checking content in the financial services sector, with a focus on online brokers and trading platforms. Michael previously reported on politics and economics in the Middle East and edits books for established publishers.

» Michael MacKenzie Profile Page

Updated

Nov 18, 2024

Contracts for difference (CFDs) have quickly gained traction worldwide, allowing traders to explore global markets and profit from price movements without owning the underlying assets. But what does that mean for traders in Botswana, and how can you make the most of these opportunities?

In this beginner’s guide, we’ll walk you through the essentials of CFD trading in Botswana, from understanding the basics to getting a handle on key strategies and risks.

Quick Introduction

• With CFDs, you’re not buying the actual asset; you’re just trading on price changes. This means you skip the complexities of asset ownership, like storage, transfer, or physical handling, handy for commodities or international stocks.
• Through CFDs, you can trade global assets like forex, commodities, indices, and stocks quoted on Botswana’s stock exchange. This allows you to diversify your trading portfolio and explore opportunities beyond your borders.
• One advantage of CFDs is the ability to profit whether prices go up or down. In Botswana’s often volatile market environment, this flexibility allows you to take advantage of both bullish and bearish trends.
• CFD trading offers leverage, meaning you can control a larger position with a smaller initial investment. This can mean getting started with a lower capital outlay while amplifying potential returns. But remember, leverage can work both ways, so managing risk is vital.

How Does CFD Trading Work?

CFD trading allows Botswanan investors to trade global markets without incurring the added expense and administration needed to own the actual assets.

With CFDs, you trade the difference, trade on margin and use the leverage offered by CFD brokers to make predictions about whether the price of an asset will go up or down.

With leverage, you can control and open more significant positions but only commit a fraction of the total value (or margin) required to buy an equivalent number of popular shares like Lucara Diamond Corp listed on, for example, Botswana’s Stock Exchange.

To show you how it works, here’s an example of trading a Botswanan stock market index, the DCI (Botswana Gaborone Index), through a CFD.

If you think the DCI will rise, consider buying a CFD position. If each CFD contract is valued at  Botswana Pula BWP 9,900 and your brokerage requires a 30% margin, then to take a position on 10 CFD contracts, you’d need a margin of BWP 297,000 (9,900 x 10 x 30%).

If the DCI rises to 10,000, the price increase will yield BWP 100 per contract. By closing your position, you would bank a total profit of BWP 1,000 (100 contracts x BWP x 100), excluding broker fees. But, if the index falls to 9,800, you will lose BWP 1,000.

This example highlights the inherent risks of CFD trading; although you get to control increased size using leverage, both the gains and losses are amplified.

Understanding how margin and leverage work is vital to your trading outcomes. If you are new to CFD trading, consider opening a demo trading account.

They’re a terrific introduction to CFD trading. You can familiarize yourself with platforms, practice new strategies, experiment with indicators and build confidence before risking your real money in the CFD markets.

Paul Holmes

Author

What Can I Trade?

Trading CFDs offers many opportunities in various financial markets worldwide and in Botswana:

• Stock CFDs – You can trade some of the most active and high-value Botswana stocks listed on Botswana’s Stock Exchange, such as Botswana Telecom and First National Bank Botswana. You could also consider trading stocks from the US, Europe, Asia and other global markets, which are more widely available.
• Index CFDs – The DCI (Botswana Gaborone Index) can be traded as a CFD. This stock market index tracks the performance of all the companies listed on Botswana’s Stock Exchange.  Many CFD traders prefer trading global market indices to capitalize on a stock exchange’s overall performance rather than invest in individual stocks. You might also consider trading the premier global index CFDs like the Dow Jones and NASDAQ with high liquidity and trading volume, and thus competitive trading costs.
• Forex CFDs – The Botswana Pula BWP is a currency traded in the foreign exchange market. The USD/BWP is popular due to the international trade in Botswana diamonds. However, be aware that the spreads trading exotic and minor pairs are higher than those for major USD and EUR pairs.
• Commodity CFDs – Critical global commodities such as precious metals like gold and silver and crude oil can be traded as CFDs, allowing traders to speculate on price movements often linked to the domestic economy and macroeconomic events.
• Crypto CFDs – The curiosity surrounding trading digital assets have grabbed the attention of Botswana’s traders. You can trade cryptocurrency CFDs like Bitcoin and Ethereum to get quick access to the volatile world of crypto.

Is CFD Trading Legal In Botswana?

CFD trading is legal in Botswana, though it operates within a framework that relies on international regulation rather than local oversight.

The authority responsible for overseeing financial trading and the markets is the Non-Bank Financial Institutions Regulatory Authority (NBFIRA).

Botswana does not have specific laws or financial regulations that govern CFDs, but traders in the country are free to participate in CFD trading through offshore brokers.

This means that while CFD trading isn’t banned, it isn’t directly regulated within Botswana’s borders, so traders should take a few extra steps to protect themselves.

Respected financial authorities regulate many providers available to Botswana’s traders in jurisdictions such as the European Union (ESMA), the United Kingdom (FCA), or Australia (ASIC).

These regulators impose strict guidelines on brokers, including transparency requirements, segregated client funds, and risk disclosures, all designed to protect the interests of traders.

Is CFD Trading Taxed In Botswana?

Botswana does not have specific tax laws for CFD trading. However, like other income, profits may be subject to general income tax if they are classified as part of an individual’s or business’s taxable income.

• Personal Income Tax: For individuals, any profits from CFD trading could fall under personal income if considered regular, substantial, and a primary source of income. Botswana’s standard income tax rates would apply.
• Capital Gains Considerations: Botswana doesn’t currently impose a capital gains tax on most assets for individuals, and CFDs might fall under this category. However, if CFDs are held as part of a business or in a way that’s closely linked to business activities, any profit could potentially be subject to business income tax.
• Business Income Tax: Profits might be subject to corporate tax if you’re trading CFDs as part of a business operation or a registered company. For businesses, Botswana’s corporate tax rates could apply, and it’s advisable to track all earnings and losses carefully for reporting purposes.
• Foreign Tax Considerations: Since CFD trading often involves international brokers, any earnings may be subject to foreign tax regulations depending on the broker’s location. However, Botswana generally does not tax foreign-sourced income, which can offer some flexibility for traders using offshore accounts.

It’s best to consult a tax professional familiar with Botswana’s tax laws and trading-specific cases for clarity.

While Botswana’s tax laws don’t directly address CFDs, keeping good records of your trades and profits is essential to ensure you stay compliant with general tax obligations.

Paul Holmes

Author

An Example Trade

Here, I’ll explain the opportunity of trading an exotic currency pair to illustrate the effectiveness of trading the difference with a CFD, and highlight techniques you could consider employing as a day trader.

I’ve chosen USD/BWP as it represents one of the most actively traded Botswanan pairs, with BWP as the counter or second currency. The other most active BWP pair would be EUR/BWP.

Botswana’s main commodity exports are diamonds, copper, nickel, beef, and textiles, typically priced in USD or EUR. Botswana is one of the world’s largest producers of diamonds, accounting for about 20% of global production; the diamond trade tends to be priced in USD and EUR.

One benefit of trading exotic pairs as CFDs in unfamiliar markets compared to stocks is that the margin needed is typically much less; my broker requires less than 5%, and the spreads aren’t excessive.

Fundamental Analysis

When trading a forex pair or an index, I always look at my economic calendar to establish the economy’s state. In this instance, I knew the dollar (USD) as the global reserve currency would be strong as markets were still experiencing a Trump ‘election bounce’.

To find out the state of Botswana’s economy only required a few clicks and filtering on my economic calendar. I’m looking for data on unemployment, GDP growth, import/export trade, inflation, government borrowing, debt v GDP ratio, deficit, interest rates, etc.

I’m always careful when considering trading against the dollar or “fighting the Fed.” Unless it’s a major currency pair, like GBP/USD or EUR/USD, I’ll need a really compelling reason to short the USD, like a sudden rise or fall in the interest rate or a central bank delivering hawkish or dovish forward guidance.

There were no compelling fundamental reasons to take a position against USD and short USD/BWP.

Technical Analysis

I’m fond of reminding contacts and colleagues in our industry that less is more. Although there are four main groups of technical indicators to choose from: volume, volatility, trend, and momentum, you don’t need one of each group on your chart, as sometimes the information can overlap or confuse.

It’s worth experimenting with technical analysis to establish which indicators work for you. In this instance, I’ve used the RSI on its standard setting of 14 and adjusted the stochastic oscillator to a ‘fast’ setting of 14,3,3 because I’m trading on a 1-hour timeframe.

This combination will give me a reason to enter and exit the trade. I’m looking for both indicators to simultaneously deliver a signal to enter and exit when supported by the price-action feedback from the Heikin Ashi smoothed candlestick option.

1HR Timeframe

In the analysis of the 1HR timeframe below, we can see three distinct periods: from left to right, ranging conditions as the market trends sideways, a bullish day-trending period, and a return to ranging conditions.

The blue arrows on the chart indicate my entry and exit points. I entered long once the stochastic lines crossed, the RSI breached the 50 median line (indicating increased volume and trading volatility), and the Heiken Ashi candle formation became bullish, with higher highs and an increase in the size of the 1HR candles.

My entry was timed with the close of the second bullish hourly candle as the third candle began to form. I was filled at 13.575, and my stop loss order was placed at the recent daily low of 13.568.

As volume reduced in the FX market, I decided against a take-profit limit order in favor of an end-of-day close. I exited at 13.712.

I executed this trade using a CFD on the spot market through my online broker. The broker required a 5% margin, and I traded the equivalent of 1000 contracts priced in USD.

The margin and exposure broke down like this: 13.575 x 1000 x 5% =  $678.75.

Using a fixed stop loss order, I risked 1% of my trading account on this trade.

Paul Holmes

Author

Bottom Line

CFD trading can offer flexibility and access in ways traditional investing can’t, making it an exciting option for traders in Botswana looking to expand their horizons.

While the local regulatory framework isn’t fully tailored for CFDs, you can securely trade through reputable, internationally regulated brokers. Still, remember to be mindful of the risks involved.

When it comes to taxes, there’s no explicit framework for CFDs in Botswana, but keeping track of your profits and consulting a tax professional can help you stay on the right side of the law.

Ready to take the plunge? Start with a solid plan and choose a top-rated CFD broker.

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