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Forex Trading in Sri Lanka

Written By

Royston Wild

Written By

Royston Wild

Royston is an experienced investor and writer. His expertise includes stock recommendations through to commodities, forex, and macroeconomic news. Royston's background includes roles as a stocks and commodities reporter, and editor of forex coverage at Shares Magazine.

» Royston Wild 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

Sep 29, 2024

On a global level, Sri Lanka’s capital markets are pretty modest. This in part reflects the Asian country’s small economy, which has a GDP of $84.36 billion according to the World Bank. However, interest in forex trading is picking up, driven by developments in Sri Lanka’s digital infrastructure and a rising interest in financial markets.

This guide will equip beginners with everything they need to know about forex trading in Sri Lanka. It also shows how a real-life trade involving the Sri Lanka rupee (LKR) might be executed.

Quick Introduction

• Sri Lanka’s forex market is small but growing quickly thanks to improving financial education and steady advancements in technological infrastructure.
• Currency pairs include LKR/USD and LKR/EUR, which involve betting the Sri Lankan rupee (LKR) against popular currencies. However, limited liquidity means major pairs like the EUR/USD are the most fashionable.
• Forex dealing is regulated by the Central Bank of Sri Lanka (CBSL), and traders typically pay income tax on profits at a rate of 6% to 36% to the Inland Revenue Department (IRD).

Forex Brokers in Sri Lanka

How Does Forex Trading Work?

Forex trading is the process of exchanging one currency for another, which is why exchange rates are illustrated in pairs. Examples include the LKR/USD, which pits the Sri Lankan rupee against the US dollar.

You buy a currency pairing when you believe the base currency (the first currency in the pair) will strengthen against the quote currency (the second currency in the pair). Conversely, you sell the currency pair when you expect the base currency to weaken against its counterpart.

Popular forex pairs involving the LKR include:

• LKR/USD (versus the US dollar)
• LKR/EUR (versus the euro)
• LKR/GBP (versus the British pound)

However, these pairs tend to experience low trading volumes. Furthermore, our investigations show their availability on forex trading platforms is extremely limited. As a consequence, Sri Lankans tend to concentrate their efforts on major currency pairs (such as the EUR/USD or USD/JPY).

Is Forex Trading Legal In Sri Lanka?

Yes. Currency trading is legal and regulated by the Central Bank of Sri Lanka (CBSL), and more specifically the bank’s Department of Foreign Exchange.

Created under the Foreign Exchange Act of 2017, the department’s objective is, in its own words, to “[facilitate] the development of an efficient, effective and orderly foreign exchange market that would be contributing to the economic prosperity of Sri Lanka.”

Retail traders should only trade forex with a CBSL-approved financial institution. However, the central bank doesn’t publish a list of approved brokerages or other firms approved to take part in the country’s currency markets.

DayTrading.com’s Best Forex Trading Platforms In Sri Lanka reveals the leading brokerages you can use to trade currencies online.

Alternatively, our Regulation & Trust Rating provides a comprehensive list of international regulators that you can use to verify a provider’s status.

Royston Wild

Author

Is Forex Trading Taxed In Sri Lanka?

Yes. Any profits an individual makes dealing currencies may be subject to income tax. Sri Lanka’s tax system is administered by the Inland Revenue Department (IRD), which charges income tax at the following progressive rates:

Sri Lanka’s tax year runs from 1 April to 31 March, and tax returns must be submitted to the IRD by 30 November of the following year.

When Is The Best Time To Trade Forex?

Currency markets are open 24 hours a day from Monday to Friday. However, traders tend to do business during certain hours when liquidity is higher and the potential for price volatility is greater.

During these periods, you will typically find it quicker and easier to open and close positions. Furthermore, higher trading volumes tend to make the dealing process more cost-effective due to narrower bid and ask spreads – which is key for short-term trading strategies.

In Sri Lanka, the best time to trade forex is generally between 17:30 and 23:00 Sri Lanka Standard Time (SLST). This is the country’s official time zone, which operates five-and-a-half hours ahead of Greenwich Mean Time (GMT).

These times are significant because they overlap trading sessions in the UK and the US, the world’s two largest forex markets.

The ideal time to trade is between 17:30 and 21:30, when markets in both London and New York are open. Business activity falls sharply after these hours following the withdrawal of British traders.

Royston Wild

Author

A Forex Trade In Action

Let’s consider how a trade involving a popular forex pair might unfold. In this example, I’ll show how a trader like myself might generate a profit by buying the LKR/USD pairing.

The Plan

My strategy is to buy the pair just before the CBSL makes its next interest rate announcement, and to sell it for a higher price shortly afterwards.

I believe that the central bank will keep rates locked at 8%, unlike the broader market which has priced in a cut to 7.75%. I come to this conclusion after studying recent economic data (like GDP numbers and inflation indices), as well as recent monetary policy comments from the CBSL.

Higher rates are good for local currencies, and so I think the LKR could rise following the rate announcement. But before placing my trade, I conduct technical analysis which – by revealing chart patterns, trend lines, and indicators – will give me a better idea of where the rupee could move to against the greenback.

Studying the charts is an essential part of many day trading strategies, as it provides insights on possible entry and exit points for my trade.

The Execution

The CBSL is due to make its interest rate announcement at 07:30 SLST. So I sit down ten minutes beforehand and make preparations to place my trade.

With the LKR/USD dealing at 0.003341, my first action is to key a ‘take profit’ instruction into my trading platform at 0.003347. This is a popular risk management tool that automatically closes my position if the pair appreciates to my selected level, thus locking in any gains.

The next step is to input a ‘stop loss’ order. The principle is the same, by shutting my position if the LKR/USD moves to a particular point. However, it will work by closing my trade if the pairing falls to a chosen level – in this case, 0.003339 – which in turn limits any losses I may make.

A few minutes after I’ve done this, the central bank makes its interest rate announcement. It’s good news for me, showing that the lending benchmark has been unchanged at 8%.

Within half an hour, the LKR/USD has moved through my ‘take profit’ level of 0.003347, closing my trade in the process and giving me a profit of six pips.

However, minor and exotic currency pairs tend to have wide spreads and it’s key to factor in trading costs and potential execution delays into your trading plan.

Bottom Line

Sri Lanka’s forex market is tiny compared with those of heavyweight Asian hubs Singapore, Hong Kong and Japan. But it is growing rapidly as broader interest in financial trading accelerates.

The best time to trade is typically when the London and New York markets are also open and volumes are therefore higher.

Despite regulation from the CBSL, fraud still exists in the currency market, so traders should only use a brokerage that’s authorized to deal by a respected regulator.

Also, it remains a high-risk activity – you could lose your entire investment.

To get moving, leap into DayTrading.com’s pick of the top forex trading platforms in Sri Lanka.

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