Forex Trading in Nigeria for Beginners.
Ultimate Guide for 2022
Forex trading in Nigeria has now become popular with an estimated daily trading volume of ₦300-450 million and over 200,000 forex traders. While retail trading in Nigeria via online Contract for Difference (CFD) brokers is not illegal, forex trading is still unregulated and there are no locally regulated forex brokers.
Hence, a prospective trader must choose only a Tier-1 regulated CFD licensed forex broker to ensure the safety of funds. There are several regulated forex trading brokers in Nigeria. These brokers are regulated by Tier-1 & Tier-2 foreign regulators. These are the chief statutory regulatory bodies that watch over financial markets including the forex market and they include Financial Conduct Authority (FCA), ASIC & FSCA, and CySEC. These statutory regulatory bodies also issue licenses to market participants such as the forex brokers that accept retail traders.
In this forex trading beginners guide, we covered all the fundamentals of forex trading for prospective traders in Nigeria. Also, it is vital to understand that CFD including forex trading is quite risky and almost 70-80% of retail traders lose their money when trading at different CFD brokers in Nigeria. Consequently, if you are looking into trading forex, then you must learn to manage your risks effectively.
What is Forex Trading?
Forex trading is the trading of one currency for another. It is all about attempting to speculate on the fluctuating currencies of two different countries. These two currencies are usually referred to as ‘currency pairs’ and these pairs are made up of the base currency and the quote currency.
The future exchange rate and exchange rate fluctuations are core fundamentals to get under the belt. There are several official currencies that are used all over the world, but only a handful of these currencies are traded actively in the forex market.
How Much Do I Need to Start Trading Forex In Nigeria?
As a result of the high currency exchange levels in Nigeria, you need about $100 to start forex trading on a lying account. However, Brokers usually advise you to start with a minimum of $200 capital to get a stronger head start.
Many Forex Brokers in Nigeria also give newly registered traders incentives of $20-50 to practice trading on their platform – this amount is often used for practice and cannot be withdrawn.
In addition to the incentives, traders are also accessible to Demo Accounts provided by their brokers. Demo accounts are funded with virtual money that traders can use to practice their trading skills under real market conditions.
Important Forex Trading Terminologies
The best way every trader should get started on the forex journey is to learn its language. In order to trade forex successfully with FXCentrum as a beginner, below is a quick look at a few terms you should get started with on your journey to becoming a successful forex trader.
- Leverage: Leverage is a mechanism traders use to increase their exposure to the market that permits them to pay less than the full amount of the investment. Using leverage allows a forex investor to enter big positions without having to pay the full purchase prices. Hence, leverage magnifies the profits from a favorable trade and also magnifies the loss from an unfavorable trade. It is therefore important to know how to manage your leverage so as to mitigate losses. Forex brokers provide leverage of up to 50 to 1 on major currency pairs. If a day trader is using 30 to 1 leverage, for instance, they tend to have more than enough leverage for trading. If the trader has $3,000 and leverage is 30 to 1, the trader can take positions worth up to $90,000. The risk is still based on the original $3,000; leverage keeps the risk restricted to a small fraction of the deposited capital.
- Spreads: this is the difference between the ask (buy) and the bid (sell) price of a currency pair. It is basically the commission brokers charge per trading position. Currency pairs with wider spreads should be avoided during day trading since they incur more charges
- Liquidity and Volatility: liquidity is the ability to buy or sell a currency pair without causing a significant change in its exchange rate. On the other hand, volatility is how much the price of an asset will fluctuate on a given day. If the market moves in a favorable direction, more volatility will result in more potential profit while resulting in greater losses in an unfavorable market. Higher liquidity leads to lower volatility because the market tends to move in smaller increments thereby resulting in lower volatility.
An asset’s ability to be traded without significant fluctuations in the market increases when traders are actively trading at the same time at a higher total volume. Hence, the foreign exchange market is often regarded as the most liquid market due to the high volume of trading activity that occurs around the clock.
However, due to certain economic factors, news, fiscal policy markets, and interest rate changes, markets can move drastically and suddenly thereby leading to low liquidity and high volatility. Metals such as Gold and Cryptocurrency pairs are typical examples of assets that undergo high volatility during day trading.
- Ask price: this is the price you enter the market when you go long, or exit the market when you go short.
- Bid price: this is the price you enter the market when you go short, or exit the market when you go long.
- Exchange Rate: This is the value of one currency expressed in terms of another. For instance, if EUR/USD is 1.3300, 1 Euro is worth US$1.3300.
- Pip: A pip in foreign exchange trading means “percentage in point” or “price interest point”. It is the unit of measure of the movement of an exchange rate and it’s assigned in decimal points to the value of a currency. For most currencies, a pip is 0.001, but for the Japanese Yen, a pip is measured at 0.01.
- Volume (Lot): Trading is calculated in lots. A lot is a measurement unit used for trading on electronic platforms such as FXC trader or MT5. For example, in 1 lot, there are 100.000 units in forex currency pairs. You can see that information anytime by clicking on the information button on the platform at the instrument.
- Position size: this is the size of a trading position that an investor is willing to trade. Position size ranges from 0.01 to 50 depending on the trading platform. In CFD, a position size must be chosen before a trade can commence.
- Long position (buy): This refers to the purchase of an asset or a currency pair with the expectation that its market value is set to rise. If you were to ‘buy’ GBP against USD for instance, you would be betting that the British pound sterling is going to outperform the US Dollar. If you buy Dow Jones 30 or US30, you would be betting that the price of the stock index is going to rise.
- Short position (Sell): a short position is the sale of an asset or a currency pair, with the expectation that its market value is set to fall. If you were to ‘sell’ GBP against USD for instance, you would be betting that the US Dollar is going to perform more strongly than the British pound sterling.
- Fundamental Analysis: a trading strategy that relies on economic, social, and political data to predict the outcome of a currency pair.
- Technical Analysis: a range of techniques using chart patterns (of past performance) to forecast the future price movements of an asset.
- Bull market: It is an expression to say that the market trend is up. Usually, it expresses a long-term trend.
- Bear market: It is an expression to say that the market trend is down. Usually, it is expressing a long-term trend.
- Support and resistance: Support is a price level where a falling price or downtrend stops due to increased demand for an asset while resistance is a price level where an uptrend or rising price reverses and begins to fall.
- Trading volume: this is the total number of shares of an asset that are traded during a given period of time. At higher trading volume, there will be more interest in that asset. Hence, it is considered to be a technical indicator because it represents the overall activity of an asset and also indicates how much demand is for that asset.
- Uptrend and Downtrend: An uptrend is a price movement of an instrument when with an upward overall direction. It consists of higher highs and higher lows. The downtrend is the opposite of an uptrend and it is a movement with a downward overall direction consisting of lower highs and lower lows.
- Risk/Reward: Risk/reward represents the amount of capital that is being risked to attain a certain profit. If a trader risks 5 pips on a trade and takes a profit at 10 pips. The reward is twice the risk, which is a good risk/reward. If volatility is higher, for instance in XAUUSD or Cryptocurrency pairs, the trader will risk more pips and try to make a relatively larger profit, but the position size will be smaller than that used in the five pips stop loss trade.
Currency Pairs Traded in Nigeria
- Major Currency Pairs (or Majors): There are numerous currency pairs a forex trader can choose from when placing a trade in the forex market. Major pairs are the most widely traded currencies in the foreign exchange market and they are any pair that includes the US dollar (USD), which holds the position of the largest economy in the world. Hence, the major pairs constitute the largest share of the foreign exchange market. Here is a list of the seven most traded forex pairs which are considered to be the most popular across the world. Major currency pairs include: EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, NZD/USD, USD/CAD
- Cross Pairs: These are any 2 major currencies that do not contain the USD as the counter currency. They have slightly wider spreads, deemed more volatile and less liquid than Major Pairs. Examples of cross pairs include: EUR/AUD, EUR/CAD, EUR/CHF, NZD/CAD, EUR/GBP, the GBP/JPY, and GBP/AUD to name a few
- Minor pairs / Exotics: These are currencies from emerging economies paired with major currencies. They are lesser well-known currencies with wider spreads, susceptible to manipulations, and can be extremely volatile in the market. They include USD/ZAR (South African Rand paired with US dollar), and USD/SGD (U.S. dollar paired with Singapore dollar).HUF (Hungarian Forint) and PLN (Polish Zloty).
Currency Pairs Traded in Nigeria
The market goes up and down based on demand and supply. However, in the foreign exchange market, certain additional key factors drive the market significantly. The main factors that play significant roles in the rates of currency pairs are changes in market inflation, economic data, politics, changes in interest rates by central banks, and volatility
- Inflation Rates: Fluctuations in market inflation bring about changes in currency exchange rates. A country with a relatively lower inflation rate than another’s will most likely observe an appreciation in the value of its currency. When inflation is low, prices of goods and services will increase at a slower rate. IN a nutshell, a country with a consistently lower inflation rate sees a rising currency value while a country with higher inflation typically exhibits depreciation in its currency and this is often accompanied by higher interest rates.
- Interest Rates: Interest rates are influenced by Central Banks to maintain monetary stability. However, changes in these rates affect currency value and foreign exchange rates. Forex rates, inflation rates, and interest rates are all correlated. An increase in interest rates induces a country’s currency to rise due to the increased demand for that currency and higher interest rates provide higher rates to lenders, hence, attracting more foreign capital, which induces a rise in exchange rates.
- Economic Data: economic reports give forex traders a glimpse into a nation’s economic performance and this influences currency rates. Economic data and reports to watch out for include Nonfarm payrolls (employment data), CPI (inflation) data, retail sales, gross domestic product (GDP), and purchasing managers index (PMI) to mention a few.
- Volatility: many forex traders frequently enter smaller positions on the more volatile currency pairs and bigger positions on less volatile currency pairs. However, volatility can strike any of these currency pairs at any time due to changes in the economic outlook, interest rates, or political instability. To trade forex successfully, It is imperative to follow these markets up to date, news, and analysis.
- Political events: elections, corruption scandals, trade wars, and changes in policies introduce instability which in turn reflects in the forex market. The government has the jurisdiction to influence the economy which can raise or depreciate a currency’s relative value.
Why You Should Develop a Forex Trading Plan?
Nigerian forex traders who wish to be successful must have a trading plan consisting of a set of instructions, guidelines, and rules that defines their trading behavior. Trading the foreign exchange market without a strategy is tantamount to going out on a trip without a map because you never know where your account will end up. While the forex market may be complex, it can be successfully navigated through due diligence, self-education, and taking it to step by step.
As a Nigerian beginner in forex trading, you must ensure that you put together some factors to formulate a trading pattern or strategy that works for you. You should also evaluate your needs, goals, and limitations before you start trading.
Having a trading strategy will effectively help you in managing your risk.
How to Choose a Forex Strategy?
One of the most important decisions that can help assure your profitability as a forex trader is choosing a forex strategy. Hence, you will definitely want to choose a winning strategy that best suits your personality and lifestyle.
When you decide on one or more strategies, you can then check out how they perform. This can be done by testing the strategies through backtesting, on MetaTrader forex platforms. It’s important that you vet your preferred strategy in the demo account provided by FXCentrum which will allow you to open without risk.
If any of the strategies still look profitable, you can begin trading them in your live account for the ultimate test. It’s recommended that you start with smaller trades and then work your way up to larger trades as you begin to gain confidence in the strategy’s performance and your ability to apply it in a disciplined way when trading a live account.
Many successful strategies for trading forex exist, but not all of them are suitable for every trader. Select a strategy that best suits your particular situation, including your available time, personality type, and risk tolerance. These are covered below based on the typical time involved, ranging from short to long term.
- Scalping: Scalping is a very short-term forex trading strategy that involves taking multiple small profits on trading positions within a short period. Forex scalpers require ultra-quick reaction times because they frequently enter and exit trades in just seconds or minutes. Scalping is considered to be a fast-paced and stressful activity that may not suit every trader.
Scalpers also strictly monitor price charts for patterns that can assist them to predict future exchange rate movements. They aim to use very short-term tick charts and generally do best using a forex broker with tight spreads. A scalper is a trader that aims to benefit from shorter market moves. A swing trader, on the other hand, uses longer time frames such as a 4-hour chart and a daily chart to generate profitable forex trading opportunities. How long do you intend to stay in a trade? Make sure you answer the question before you pick your preferred trading strategy,
- Price Action Trading: This is also a strategy for part-time traders that include the study of historical prices to formulate technical trading strategies. It applies to those who pop in and out of work (around 10 minutes at a time). Price action can be adopted as a stand-alone technique or in conjunction with an indicator. Price action trading means analyzing the charts or technicals of a selected currency pair to inform trades. In price action trading, forex traders can analyze up bars, particularly those that have a higher high or higher low than the previous bar and look at down bars i.e. a bar with a lower high or lower low than the previous. Up bars, in forex signal an uptrend while down bars signal a downtrend. Other price action indicators may be inside or outside bars. The key to attaining success with this strategy is trading off of a selected chart timeframe that best meets your schedule.
- Day Trading: This is another short-term trading strategy that is followed only during a particular trading session. Day traders generally do not take overnight positions, so they close out all trades each day. This helps reduce exposure to market movements when the trader is inattentive to the market. Most day traders use trading plans based on technical analysis on short-term charts that show intraday price action. Many day trading strategies exist, but a popular one is known as breakout trading. Trades get triggered when the exchange rate moves beyond a given level on the chart for a currency pair and are confirmed when accompanied by an increase in volume. The 30-minute candlestick chart of GBP/USD shows a breakout below the level of the lower of the 2 converging trend lines of a triangle pattern drawn in red. Note that trading volume also increased when the breakout occurred, thereby confirming it.
- News Trading: This strategy is used by forex traders with enough funds and the desire to take bigger risks; hence, it is not ideal for forex beginners. News trading can be based on technical and fundamental analysis and is generally influenced by the notable volatility often seen in the foreign exchange market immediately after important news is released. In addition, news forex traders need to observe economic calendars for key data releases and watch the market closely before the event to ascertain key support and resistance levels so that they can quickly maximize after the event based on the results. With a news trading strategy, you need to regularly maintain strict discipline when managing your currency positions during such fast markets and always place stop-loss and take profit orders in the market. A typical example of an economic calendar event that a news trader might utilize is U.S. unemployment claims. This particular data was volatile during the COVID-19 shutdown in the U.S. and influenced considerable fluctuations in the foreign exchange market after its release.
- Swing or Momentum Trading: This strategy is sometimes known as momentum trading and it consists of a medium-term trading strategy that captures more market moves. Swing trading focuses on larger price movements than scalping or industry trading. This means traders can set up a trade and check in on it every few hours or days rather than having to constantly watch their platform. Swing forex traders implement this strategy by trading both with major trends and also against them when the market is correcting, so they should be willing to hold overnight positions. They aim at focusing on entering and existing trading positions based on momentum indicators that assist in providing buy and sell signals. Swing Traders use the indicators to find overbought or oversold markets that they can sell or buy. Sometimes, they might buy ahead of support or sell before the resistance levels that appear on the charts of the exchange rate for a currency pair. Commonly used momentum indicators in trading include Moving Average Convergence Divergence (MACD) histogram and relative strength index (RSI). Below is a daily candlestick chart is shown for the USD/CHF currency pair displaying the MACD and RSI in indicator boxes.
- Trend Trading: This is a longer-term forex trading strategy that involves following the existing trend or directional movement in the market for a preferred currency pair. It often involves buying on pullbacks during uptrends or selling on rallies during downtrends. Trend traders often use trailing stop-loss orders to secure their profits if a significant reversal materializes. Most trend traders also use technical analysis indicators like the ADX (Average Directional Movement Indicator) and moving averages that smooth out the price action for better identification of trends. In addition to that, they also utilize longer and shorter-term moving averages and watch out for crossovers to signal a potential reversal. The candlestick chart below shows an upward trend after progressively making higher highs and higher lows.
Read more on Forex trading strategies
How to start Forex trading in Nigeria?
To start capitalizing on small price changes in the foreign exchange market in Nigeria, you must put the following into consideration.
- Ensure you have a strong Internet Connection: This is because the forex market is traded online through a broker and with a strong internet connection you will be able to exchange foreign currencies while keeping an eye on the market trend. In Nigeria, the internet can be slow and unreliable. To trade successfully and thoroughly monitor your trades, the first important step is to have a stable internet connection
- Utilize your devices: Many professional traders use multiple devices to trade. In trading, while a device can focus on only one signal, different devices will help you pay attention to different activities including charts, trades, signals, and so on. A trader or investor needs to process a high volume of information and this will be easily achieved on multiple displays.
- Trading Capital: Bumping into the foreign exchange and CFD markets without capital is like walking into a grocery store and picking items that you can’t purchase. You need to start with a good trading capital of about ₦50,000 – ₦200,000 and this is vital to the smoothness of your trading journey.
- Open an account with a Trusted Broker: Register with a trusted, reputable, and licensed forex broker to help you set up a forex trading account.
- Devise a trading strategy: to be a successful Nigerian trader, you should evaluate and put together key factors to formulate a trading pattern or strategy that works best for you. Having a trading strategy will help you manage your risk effectively.
How to enter a Trade?
1. Open an account with FXCentrum: As a beginner, you must start with a demo account where you can practice with $10,000 worth of virtual funds. With our demo account, you can learn how to trade by building & testing out a strategy, after which you can figure out what works. When you have mastered your trading style, you can start trading and earning on a live account.
2. Study the trading costs: We offer the best competitive spreads and low margin rates on major, minor and exotic crosses.
3. Choose a Currency pair or any CFD instrument to trade: We offer over 200 currency pairs, metals such as Gold and Silver, cryptocurrency pairs, indices, commodity CFDs, and stock CFDs that you can trade on. Many trend traders choose to focus on one or two specific instruments while some traders diversify their opportunities by trading several instruments over a range of markets thereby gaining exposure to more trends.
4. Place your first Trade: after you have chosen an instrument to trade, you will now decide whether you want to enter a “long position” or a “short position. In trading, entering a long position means buying a currency pair or betting on it to rise in value in the future while entering a short position means selling a currency pair or betting on it to fall in value in the future. Before you can achieve this, you will need to study and analyze the charts or the market news & then decide whether you want to go long or go short.
For example, if the exchange rate of GBP/USD is 1.3000 & you believe that it would reach 1.3500 shortly, then you can enter a buy order, hence you would be buying the British Pound & selling the US Dollars. On the other hand, if the exchange rate of GBP/USD is 1.3800 & you believe that it would fall to 1.3500 shortly, then you can place a sell order, hence you would be selling the British Pound & buying the US Dollars.
Buying and selling orders in forex are similar to other CFD instruments.
5. Concentrate on your trades: forex trading requires concentration, patience, and analytical skills.
Benefits of Forex and CFD Trading
- The forex market is open 24 hours a day, five days a week and you can always capitalize on different active session’s forex trading hours.
- Can be used with a hedging strategy.
- Enable a trader to trade on both rising and falling markets.
- Grant traders the ability to go both long and short on underlying assets.
- Offer a wide range of markets. CFDs allow investors to trade the price movement of assets including forex currency pairs, ETFs, stock indices, and commodity futures.
- A trader can enter various markets, like commodities, currencies, shares, and indices from the same trading platform.
- Provide higher leverage thereby allowing traders and investors to invest a small amount with a broker.
- Forex and CFD brokers typically offer CFDs with higher leverage than other traditional financial instruments.
- Spare traders from the costs of traditional trading.
Risks involved in Forex and CFD trading
It is vital to understand that CFD including forex trading is quite risky and almost 70-80% of retail traders lose their money when trading at different CFD brokers in Nigeria. This could be a result of the following
- Leverage can also magnify losses the same way it amplifies gains with CFDs
- Excessive price volatility or fluctuations brings about wide spreads between the buy and sell prices from a broker
- The CFD industry is not highly regulated, hence it is restricted in countries such as the U.S., due to the lack of regulations, and traders are reliant on the reputation and credibility of brokers.