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Forex Trading in Nigeria: A Complete Guide for Beginners
Nigerians, like any other country in the world, can use Forex to make money.
The international currency market is essentially an economic phenomenon, a market it is called conditionally, because unlike the classical stock markets or stock exchanges – New York or London, forex has no centralized location for transactions. This makes Forex more global than all the stock markets of the world put together.
Forex has also become popular in Nigeria, as evidenced by the daily trading turnover of 300-450 million Nigerian Naira. Everyone can be attracted to the foreign exchange market because of its unique characteristics:
- Here is the largest financial turnover in 1 trading day – 6.5 trillion dollars daily turnover at Forex (for comparison, the world’s largest stock market – New York, where more than 50% of the total turnover of the world’s exchanges are traded, during a trading session turnover of 60 billion U.S. dollars).
- Twenty-four-hour trading.
- A global market with no specific trading venue.
Beginner investors ask quite a natural question: is trading really that profitable? What is the right way to start trading? What risks does Forex carry? What kind of profit can be received at a full working day or at a shortened one? These and other questions are revealed further in the Forex trading guide.
What is Forex trading
Forex market is an international market or a set of currency exchange transactions, where the sale or purchase of different currencies takes place, the main purpose of which is to make a profit. The income is derived from the fluctuations of currency pairs bought by the investor. It is intended for active financial operations.
Forex originally created for large, institutional participants or investors – large investment hedge funds or banking structures. Over time, private investors began to enter the market. Now Forex is available to everyone regardless of the country one lives in and what currency he uses.
Trading is done 5 days a week, around the clock which is one more undeniable advantage compared to the classical stock markets.
Description of currency pairs
Trading profit is made by buying a currency pair at one price and selling it at a higher price. When Forex appeared, only currency pairs were traded there, it was designed for exchange operations. Over time, investors and speculators began to make money on currency fluctuations, because due to the huge liquidity, the market is very fluid.
Today, the range of trading instruments in the market has expanded: traders have access to binary options, work with commodities on the CFD. However, Forex is still associated, first of all, with currency pairs.
A currency pair is two currencies, the price of one currency is expressed by the price of the other. There are more than 100 currency pairs, the most recognizable in the world are EUR/USD (Euro against the American dollar), CPB/USD (British pound against the U.S. dollar).
Important. It is more convenient to express the value of one currency over the other. For instance, in the USD/JPY pair, the U.S. dollar is more expensive than the Japanese yen (by about 100 times), so it is in the first place.
Currency pairs are divided into major, minor and exotic
Types of currency pairs in Forex
Pairs are divided into groups, depending on which world currencies are included. Three groups are distinguished.
Major currency pairs or pairs that include the U.S. dollar. About 85% of the total trading volume is accounted for by them.
The group includes: EUR/USD (Euro/USD), USD/CHF (Dollar/Swiss franc), GBP/USD (British pound/USD), USD/CAD (US dollar/Canadian dollar), USD/JPY (Dollar/Japanese Yen), ASD/USD (Australian dollar/US dollar) and NZD/USD (New Zealand dollar/US dollar).
Since the major currency pairs account for most of the world’s FX market turnover, they are easier to deal with: because of high liquidity and volatility, fast price movements occur, so traders reach target price levels faster to lock in profits.
Important. Each currency pair is most active during the trading hours of the country whose currency is in the pair. Thus, trading with the Australian or New Zealand dollar is the most active during the Pacific session hours – from 2:00 to 10:00. Pairs with Euro or Pound are the most volatile during the European session – 10:00 – 19:00 and partially, when the American market opens – after 15:00.
Secondary currency pairs.
The group consists of pairs, which do not include the American currency. In other words, pairs are called cross rates. This includes all pairs that contain popular world currencies: EUR (euro), JPY (yen), GBP (pound) or CFH (Swiss franc).
Examples of such pairs: EUR/GBP, EUR/JPY, EUR/CHF, CHF/JPY. All of the major world currencies included in the major currency pairs are used in combinations, except for the American dollar. The secondary pairs have lower liquidity, as trading volumes are smaller.
Exotic currency pairs.
Such pairs consist of one major currency (of a developed economy) and a second one (of an emerging economy).
Examples: USD/TRY (USD/Turkish Lira), USD/RUB (USD/RUB), USD/BRL (USD/Brazilian Real), USD/HKD (USD/HKD), USD/MXN (USD/Mexican Peso).
Foreign exchange market terms
When investors begin their acquaintance with Forex: when they choose a broker or open their first trades, they immediately encounter the terms that are most commonly used by market participants. The most popular terms or concepts are as follows.
Broker quotation. Or that value at which a Forex broker offers a client to buy a currency pair. Quotes can vary from broker to broker, it depends on what liquidity providers the companies use, whether they have a real access to the intermarket or trade within the system.
A pip or minimal change in price or quote. For example, if the price of the EUR/USD currency pair changes from 1.1744 to 1.1746, it is said that the price has changed by 2 pips. However, many brokers offer accounts where the price change is more volatile, because they use 5 decimal places instead of 4. It appears that in 5-digit quotes, the full price of the EUR/USD pair when it changes from 1.17449 to 1.17465 does not change by 2 pips as in the first case, but by 16 pips due to the use of 5 digits in the price.
Ask or bid price – the price at which the broker is currently ready to purchase a currency pair from the trader. Or the price at which the trader can sell the currency pair. It is placed in the table of quotations on the left.
Ask or bid price – the price at which the trader can buy the currency pair, and at which the broker can sell it. It is specified in the right part of the table of quotations of the broker.
Spread is the rate difference between the bid and the ask prices. It is one of the components in the commissions. In other words, the higher the spread, the more the broker earns and the more the trader loses. When choosing a forex broker, it is important to look for a partner with minimal exchange rate differences.
Swap is a fee for transferring a position to the next trading day. It may be both positive and negative. The value is specified in trading conditions and contract specifications for specific currency pairs. It depends on a broker, a currency pair type and an open order (long or short). Some trading strategies are based on swaps when at the expense of the volume on open transactions and positive swap the trader earns on open positions.
Leverage is a loan of funds provided by a broker so that a trader can use more resources in trading and buy more lots of currency pairs. Leverage is used on any type of instrument and on any exchange, not only Forex, but also on the regular stock markets. With the difference that forex offers leverage up to 1:500-1:1000, while on the stock market the leverage is limited and is usually up to 1:3 or 1:5.
How to start Forex trading in Nigeria
Access to the foreign exchange market for Nigerians is open daily at any time. To start trading all the trader needs is free time, computer or laptop with stable and high-speed internet, a proven trading strategy (or better several) on a demo (virtual) account and initial investments on the account. Brokers offer to begin trade with 1$, but specialists recommend investing at least 50,000 Nigerian Naira.
First steps, which should be done by a beginning trader:
1) Open a trading account with a forex broker. A broker is an intermediary who provides clients with access to the foreign exchange market and charges a commission for this. It may consist of the spread, charges for deposit or withdrawal of funds, additional commissions. You should be particularly careful when choosing a broker because it is the quality of the company’s services that can affect your profit. Forex market is very volatile and the speed of execution and opening of deals is very important here. A broker must be able to place orders on the market immediately.
For forex trading in Nigeria, investors have access to some of the best forex brokers in the world: HotForex, FXTM, Exness, Oanda, Forex.com, FxPro, XM Forex. The enumerated companies are included in the rating of the best brokers according to reviews of real clients, ratings of authoritative financial agencies or publishing houses, they are licensed by authoritative forex-regulators (FSCA, FCA or CySEC). Offer advantageous trading conditions to their clients: instant execution of market orders, minimal spreads and commissions.
2) It is better to begin trading on demo accounts – practice accounts with virtual money. Professional traders do not recommend to go straight from theoretical training to trading on real accounts. Demo accounts are offered by every decent brokerage company, allowing to learn how to open transactions and correctly place orders for loss limitation – Stop loss or closing transactions when the target level is reached and profit fixing (Take Profit). Protect your initial deposit from losses, which may occur due to incorrect prediction of the price chart movement. Virtual account will help to test trading strategy, learn to determine the maximum volume of traded lot, determine the comfortable leverage, practice building price charts and use of indicators or oscillators. After gaining positive result from trading on a demo account, a trader may switch to working on a real account.
It is important. Any broker complying with the international legislation in the sphere of financial operations supports the KYC policy (know your client). It requires identification of the client’s identity when opening the account. Thus, the client must open the account at the broker, undergo the verification procedure – confirmation of the data specified in the application form. The documents confirming the identity and the registration address are requested. Additionally, the details of the bank card used for transactions in the service may be requested.
3) Opening the first deal.
After a trader has chosen a Forex broker and tested the strategies on a virtual account, he can proceed to trade with real money. It is possible to open a deal in Forex in two directions: “long position” (buying an asset) or “short position” (selling).
To open an order, the trader needs to analyze the current direction of the chart of the selected currency and possible prospects. Peculiarities of the basic positions on the market:
A long position or long opens when buying a currency pair, when the investor has decided that the currency quote will rise. For example, if the current price of the currency pair USD/JPY is 109, 740, and the trader thinks that the asset will rise in value to 110, he opens a long position on the pair, buying dollars. A long position in currencies is similar to the purchase of stocks or bonds on the stock market. The price of the asset starts increasing and, as soon as profit is obtained, the trader fixes the profit and closes the position, i.e. he sells the pair at a higher price than he bought it.
The client chooses a short position or sell, if he believes that the quote of the chosen pair will fall in the near future. The trader believes that the currency pair USD/CHF is evaluated at 0.9140 and the current economic events will lead the US dollar to fall to 0.8990; in this case, the trader opens a sell order. As soon as the quote reaches the price level set for profit taking, the position is closed or the trader sells the currency at a lower price than he bought it.
4)To close an open trade. To fix the profit (or loss), it is necessary to close the open trade.
Example. A trader opened a long (buy) position on the EUR/USD currency pair at 1.17400, the price went up by 100 pips or to 1.17500, the trader closed the position and made a profit of 100 pips or $100 if traded by 1 lot. If the price moves in the opposite direction, then the trader will incur a loss
It is possible to close an order on the market in different ways:
Manual transaction closing, when a trader manually closes a position without waiting for a predetermined price level or when the position balance is negative, in order to limit losses.
Take Profit – predetermined command at a specific price level of currency pair, when reached, the transaction will be closed automatically.
Stop Loss – limitation of losses or in case the price on the opened currency pair will go against the predicted direction (trader opened the deal for purchase or growth of currency, and the asset began to fall sharply), at a predetermined price level the deal will be closed automatically. Thus, the investor will incur losses, but limited by the order.
Stop Out – forced closing of an open position by the broker in case of a negative balance.
Trading strategies on the Forex market
A trading strategy is a set of rules that a trader follows when making transactions. Positions should be opened only according to a well-planned algorithm, not because the investor thinks that the price should start growing now.
Each trading strategy is based on technical or fundamental analysis or both systems are used together.
Technical analysis is trading based on a study of the price chart, indicators, clusters or trading volumes, chart patterns and past data to predict how prices will behave. As the greatest traders believe, without the use of technical analysis in trading, it is impossible to succeed. This is what Marty Schwartz, one of the most successful traders of the 20th century, said: “I always laugh at people who say they have never met a rich devotee of technical analysis. Did you hear that? An arrogant and meaningless statement. I’ve been using fundamental analysis for nine years, but I’ve only really gotten rich as a technician.”
Fundamental analysis uses economic news or events: GDP data, speeches or press conferences by famous politicians which can affect short-term price behavior, unemployment or inflation rates
Technical Analysis
Most technical analysis strategies are based on the obligatory study of the price chart. The golden rule of technical analysis – history repeats itself, says that certain price levels, which the price has reached, should always be considered as potential levels, to which the quote will tend in the future. For the convenience of analysis, traders can use the popular on the market trading platforms MetaTrader 4 and MT5 (offered by all brokers), whose interface includes popular and convenient tools of thehanalysis.
Important. Before entering the market, experts strongly recommend studying the current situation on the market, elaborating a trading plan and only after that opening positions.
Among popular trading strategies, based on the analysis, are the following:
Trading on resistance or support levels (trading against the trend).
Trading against the trend is not recommended by any analyst-trader. When working against the trend, it is necessary to identify the current direction of price movement or the general trend. An uptrend is every previous price minimum and maximum above the previous one. A downtrend shows the opposite picture – every subsequent price maximum and minimum is lower than the previous one.
Then we analyze the chart, which clearly shows price retreat or return to the previous price level, which is considered a support level (if the price went up from it) or resistance (the price failed to break through the level and rolled down). When price reaches the levels, it rolls back and goes in the general direction of the trend. When price reaches a new high, the previous high becomes a new support or resistance line.
This strategy is available to beginners because it does not involve the use of any additional tools. Only the chart is analyzed. The strategy is most often used on seven major currency pairs: USD/CHF, GBP/USD, EUR/USD, USD/CAD USD/JPY, ASD/ USD and NZD/USD.
It will be easier for beginners to apply the strategy to the major currency pairs, because they have the highest liquidity and volatility. Additionally, to help beginners, there is a daily market analysis conducted by the biggest forex brokers for their clients. The reviews analyze popular currency pairs and give recommendations on possible price behavior scenarios.
Intraday trading.
Day trading is not a strategy, but a type of trading, when the work is done in short time intervals, the deals are opened and closed during one trading day. Another name for the strategy is scalping. Professional speculators can open 100 trades each. For beginning traders, intraday trading will help them learn how to determine the optimal entry point. Minimize losses by closing trades quickly.
Forex trading platforms in Nigeria
When the investor is ready to start trading, it becomes a question of choosing a trading platform, through which the client forms a request to open an order on the market. Each forex broker offers different trading applications. The best brokers and platforms are discussed below. Which they offer traders.
Advantages and risks of Forex trading
Forex trading as any other investment activity is inseparably linked to risks. It’s easy to earn up to 200% to the initial capital for a trading session and easy to lose the entire deposit for a few hours – the market can be so volatile. Experience of Forex traders in Nigeria notes the following features of trading.
Advantages of Forex trading
You can start trading with a small investment. A trader can start with 1,000 Nigerian Naira. Most brokers offer several types of accounts: for beginners with a minimum deposit or cent accounts.
Great market potential and huge volumes. The global nature of Forex makes it the largest financial market in the world, with high volumes concentrated here, creating high volatility, both intraday and over long periods of time.
The market is open 24 hours a day. One of the key differences from the classical financial markets – Forex works without pauses for clearing and transactions are opened at any time convenient to the client. You can trade during the day or at night.
Wide range of currencies. Another advantage of the currency market is the ability to trade not only popular currencies but also exotic ones. Traders who are not familiar with the American dollar and the peculiarities of the US economy can choose the currency which is easier to understand for trading: local or neighboring countries, economics of which they know.
Forex Trading Risks
The risks of trading with leverage. Forex brokers offer trading with high leverage – up to 1:500 and sometimes up to 1:1000, which is hundreds of times higher than in the stock markets. Such credit allows the broker to borrow and open additional orders without having enough funds on the account to secure the open positions, which, in case of price movements against the open trades of the trader, result in a negative balance and often lead to losses and forced closing of positions. Professional traders do not recommend working with a leverage of more than 1:100 and opening positions with possible losses of no more than 5% of the total account balance per one transaction.
There are a lot of scam brokers on the market. Availability of the market attracts millions of those wishing to trade, so there are plenty of unscrupulous companies as well. A broker should be chosen by strict rules: availability of licenses, positive references from clients, representative offices in different countries and long term of existence (more than 10 years).
The risk associated with high volatility. Currency pairs are one of the most volatile financial instruments, sensitive to any economic or political news. Therefore it is important to monitor the market for upcoming events before opening a position, so they do not negatively affect open positions.
Emotional stress. It is possible to enter the market only when a trader is morally ready to lose the invested capital. One unsuccessful transaction can bring losses of up to 90% of the deposit, as well as one successful transaction can increase the capital by 1000%.