For Nigerian Investors, forex trading can be a way to earn wealth.
It involves speculating on the rise and fall of the currency fluctuations. It has become really popular in Nigeria with an estimated daily trading volume of ₦300-450 million. You may be attracted to forex trading because it offers opportunities/potential to make good profits in less time (minutes & hours instead of months) with your investment.
But is trading in the forex market really profitable for small individual investors? How much income can you earn from trading forex part time or full time? What are the risks?
There are so many other questions that may come to your mind if you are a beginner forex trader. We will try to answer all these questions and more with this guide.
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Forex trading is the buying & selling of currencies with an aim to make a profit. Traders can place their trades in the forex market, which is an over-the-counter market that allows investors to trade currencies. This is a platform for investors, institutions, banks, and traders.
Foreign Exchange Market is the largest trading markets and has an average turnover of US$5 trillion on a daily basis around the world. This is larger than all the stock markets in the world combined together. Trading activities are conducted through the Interbank Market which allows you to execute trades 24 hours in a day, for 5 days a week from Monday through Friday.
Have you traveled overseas? If you have then the chances are that you have already traded currencies before. This is because you need to acquire the currency of the country you are visiting by exchange the currency of your home country.
Lets say that you change ₦350,000 to US Dollars for travelling, and you get 1000 USD from the exchanger.In this example you are physically buying USD by exchanging your Nairas. When you change your Naira into a different currency to spend money on your trip, you are actually making a forex transaction.
The rate that you get from your exchanger is decided on the basis of the real time exchange rates plus the profit margin of the money changer.If the current market rate is NGN340 per USD, then you would probably get around ₦350 rate from your changer. The difference of ₦10 (350 340) for each USD is your changers profit margin.
In theory, this is what online forex trading on the internet is all about, but still a bit more than exchanging currencies through a Money Changer.
All transactions in the forex market are based on the purchase of one currency for the sale of another currency. So you are trading or exchanging the 2 currencies simultaneously for one another, hence known ascurrency pairs.
For example:EUR/USD (Euro & the US Dollar), NGN/USD (Nigerian Nairas & the US Dollar) etc.
There are 100s of currency pairs, including the so called Majors, minors & exotic. It is really important to understand what currency pairs, and how they work before you can start trading Forex.
In this chapter, you will learn everything you need to know about Currency pairs. Lets start!
Currency pairs are mainly classified into 3 types:
1) Major Currency pairs:These are the currency pairs that include US Dollar as one of currency in the pair. Almost 85% of the global trading volume is traded in the majors.
Majors include 7 currency pairs:EUR/USD (Euro/US Dollar), GBP/USD (Pound/US Dollar), USD/JPY (US DOllar/Japanese Yen), AUD/USD (Australian Dollar/US Dollar), USD/CHF (US Dollar/Swiss Franc), NZD/USD (New Zealand Dollar/ US Dollar) and USD/CAD (US Dollar/Canadian Dollar).
Since most of the trading is done in majors, so they are highly liquid & it is easier to get in & out of trades. The opportunities to make profits are higher.
2) Minor Currency Pairs:Minors, also called the cross curreny pairs, contain all the currencies in the major pairs except for US dollar. These include EUR (Euro), GBP (Pound), JPY (Japanese Yen) etc.
Examples: EUR/GBP, EUR/JPY, GBP/JPY etc. As you may have noticed that these are the crosses of all the major currencies excluding US Dollar.
The liquidity & volume are lower than majors, so trading opportunities may be lower than with majors.
3) Exotic Currency Pairs:Exotic Currency Pairs are made from one of the currency from major pairs and other one from the emerging economies like: Brazil, South Africa, Mexico, Russia etc. Examples of such pairs include: USD/BRL (United States Dollar/Brazilian Real), USD/HKD (United States Dollar/Hong Kong Dollar), USD/ZAR (US Dollar/South African Rand), USD/RUB (US Dollar/Russian Ruble) etc.
Exotic Pairs usually dont have high liquidity & trading volume but they have high volatility plus they have high spreads as compared to Major & Minor Pairs.
As a beginner Forex Trader, you need to stick to major pairs only as it offers high liquidity and predictable market movements.
While trading forex, you would come across these common terms. We will be explaining all the important terms here.
1) Quote by the broker:When you open a trading account with a Forex Broker, they tell you the Bid/Ask price to buy & sell the currency. It will be quoted like this example: EUR/USD 1.2812/15. This price is the quote by the broker.
2) Pip:Pip is the smallest unit in the currency quote (given by the Broker). It is the last decimal in the price. For Example: In the quote 1.2811 moves to 1.2812, the movement in the last decimal is 1 pip.
3) Bid Price:Bid price is the price at which the broker is willing to buy a currency pair from you. At this price, you can sell base currency in the pair. This price is shown on the left side in the quote ticker by the Broker.
For Example: If you see the quote as EUR/USD 1.2812/15, then 1.2812 is the quote price, and it means that you can sell 1 Euro for 1.2812 US Dollars.
4) Ask Price:Ask price is the price, at which the broker is willing to sell a currency pair to you. At this price, you can buy the base currency mentioned in the pair. It is shown on the right side of the quote ticker by the Broker.
For Example: When you see the same quote as above it had 2 values in it: EUR/USD 1.2812/15, the second value tells you about the Ask price, it means you can buy 1 EUR for 1.2815 Dollars.
5) Spread:Spread is the difference between the Bid & Ask Price quoted to you by the broker. So in above example: in which quote is EUR/USD 1.2812/15, the difference between 1.2815 minus 1.2812 i.e. 0.0003 or 3 pips, is the spread.
Forex trading can now be done by anyone in Nigeria, anytime, from home or anywhere through the internet. All you need to trade forex online is a laptop, good internet connection, good trading strategy tested on demo & starting capital which we recommend to be atleast ₦50,000.
You need to signup with a Forex broker. There are many good & scam brokers. We will tell you exactly who to choose.
Finally, once you have a trading account we will show you the Forex Orders that you can place, and the profit/loss calculation.
In order to trade forex, you need to find a broker. There are numerous forex brokers available for Nigerian traders such asHotforexExnessXM ForexFXTM, , FxPro, Oanda etc.
We have compiled the list ofbest forex brokersfor Nigerian traders.All of the brokers that we recommend on our website have proven track record of honest dealing with traders, and are authorized/regulated by top-tier global Regulatory bodies (FCA, FSCA, CySEC & ASIC) for the safety of your funds.
ForexTimeis the best broker for Forex trading in Nigeria.
Competitive Spread on majors (and zero fees on deposits & withdrawals)
Easy to use (mobile-friendly) MT4 & MT5 platforms
56 Currency Pairs, 4 Cryptocurrencies, 100s of CFDs
Your funds are safe regulated with UKs FCA (Financial Conduct Authority), CySEC (Cyprus Securities Exchange Commission) and FSCA (Financial Sector Conduct Authority in South Africa)
Start Trading at FXTMImportant: Forex Trading is risky, so have a working strategy before trading live.
Start with Demo Accounts:Never start trading directly on a live account if you are a beginner as your real money will be at risk. We advise you to first create a demo account with the broker of your choice and then learn to trade by building & testing out a trading strategy that works for you. Only once you are confident about your trading style & strategy, only then you should decide to trade with real money on a Live account.
Once you have found the forex broker of your choice, you can then open an account with that broker to start trading (or demo account to learn). This account will enable you to place your trades in the interbank market at the live currency prices.
If you are creating a Live account: All reputed brokers have some sort of KYC (ID & Address proof verification)& you cannot start trading in the market without verifying your account with any of the regulated broker. Once the verification is complete, you will need to make a deposit to fund your live account. These funds will be used to place live trades at the real market prices.
After you have created your live account & funded it with your Forex broker, you can then open your first trade. The two positions that you can take in the Forex market are either the long position or the short position.
The long positionimplies that you are buying a currency pair and are betting on it to rise in value in the future. For ex. If you currenny market price of EUR/USD is 1.1000 & you believe that it would reach 1.25 in the near future then you can place a buy order, hence you would be buying Euros & selling US Dollars.
Buy order in forex is similar to buying an equity stock. You buy the currency at a low price, and once it reaches a higher value, you can then sell off the currency, thus making your profit.
The short positioncan be taken when you believe the price of the currency will fall in the upcoming period. If the present price of EUR/USD is 1.10 & you think that it would fall to 1.0 in the near future then you can place a sell order in the marker.
You can place a sell order when the currency is at a higher price and then when the value falls significantly, you can buy it back at lower price, thus realizing your profit.
To realize your proft (or loss), you need to close the trade that you opened.
Profit or Loss?Depending on the movement of the currency pair that you were trading, you will either be profitable or make a loss once you close the trade.
Example:If you have placed a buy/long order on EUR/USD, and the price of the pair goes up by 100 pips, and you decide to close the trade. You would have made a profit of around $100 (minus spread) if you are trading 1 Mini Lot.
But if the EUR/USD goes down 100 pips, and you decide to close the trade. You will make a loss in this case.
Also Read: Our detailed guide onHow to Trade Forex in Nigeria
There are many different strategies that are followed by successful forex traders. But most of them fall into 2 categories which areTechnical Analysis and Fundamental Analysis.
Technical Analysis involves the study of charts patterns, currency trends etc. and then placing the order based on the chart patterns. While the fundamental analysis is mainly related to trading based on the news events like GDP, Job data etc.
In this chapter we will only analyse popular technical analysis strategies.
Most technical forex trading strategies involve some level of study and analyse of the chart or trend patterns of the currencies before making an actual trade. Good thing is that almost all brokers around the world now offer MT4 or MT5, which are excellent platforms for sound technical analysis.
Advise:Building an understanding of the current market scenario & having a working strategy before placing a live trade is highly recommended. Only based on your strategy, you can make actually get the best returns in the future.
Now lets look into some of the most popular forex trading strategies.
In theory, trend trading involves identifying a trend, waiting for the pullback in price & then following the continuation wave. This is one of the most profitable trading strategy in a trending market & was also the main strategy for highly successful traders like Jesse Livermore.
Lets say the high for EUR/USD for the last 3 months is 1.31 (making it a price level of importance). We call the high theresistance.
Once the price crosses the previous high to achieve a higher high, there is a huge chance that the old high will become the new low in a trending market. The low is now called thesupport.
Stick to the Majors:In the current scenario, there are seven major currency pairs which constitute almost 80% of the transactions. These major pairs include USD/EUR, USD/GBP, USD/JPY, USD/CHF, USD/AUD, USD/CAD, and USD/NZD.
If you are a new investor, it is a good strategy to begin trend trading with one of these pairs. This is because these pairs are very liquid and have stable volatility. Since these currencies are stable, they will help you in managing your risk initially. It is always a good strategy, to begin with, a USD pair because of stability. There are various other pairings available which do not include the USD.
Day trading is not strategy per se, it is more of a trading routine. In this strategy, you place your trades, and close them within the same day or within a 24-hour window and book your profits (or loss).
You can realise profits quicker in this strategy, although the amounts might be smaller. This is a very common strategy followed by a wide variety of small investors. Another strategy is known as scalping. This strategy is based on opening a position for a short time and closing it to make a small profit. These strategies can be a great way to book profits quickly.
If you are ready to start Forex trading then you may have doubts on which broker should you choose to trade online.
In the table below, we have compiled list of brokers that we have found to be best in terms of platform, withdrawal time & more in meeting the expectations of profitable traders in 2019.
We have only selected brokers that are regulated & offer both Mobile & web trading platforms.
2019s Best Forex Trading Platforms for Nigerians
MetaTrader 4, MetaTrader 5, Webtrader, iOS, Android apps
FCA(UK), CySEC, ASIC (Australia), IFSC(Belize)
Forex Trading, like any other investment has many benefits but also carries significant risks.
On the positive side, forex trading has the potential to bring good income if you trade with a working strategy. And you dont even need very high capital to start.
On the downside, one bad trade without proper money management can be disastrous, or trading with real money without practising on demo. These are just the few risks.
Lets analyse the benefits & risks of trading Forex!
You can start trading in the forex market with as low as NGN 1000, as brokers these days have very low minimum deposit & very high leverage. But it is highly recommended that you only start trading with a capital of atleast ₦50,000 & never risk more than 5% of your capital on a single trade.
Forex market is the largest market in the world with close to 5 Trillion USD daily trading volume. This makes it very liquid & you can easily place very large orders as well & close them without having to worry about price volatility because of your trade (unless there is some major event).
In forex, you can open take both short or long position to make a profit. If you feel that the particular currency is on the way up, you can buy it and go long. On the other hand, if you feel that a currency is not performing well, you can sell it and go short.
Another key benefit of forex trading is the ability to trade 24 hours, for five days in a week. These trading hours are much longer compared to traditional stock exchanges which allow you to place an order or close it during limited trading hours. In forex, you can place a trade & close it anytime during the week instead of waiting for the markets to open during the day. You might want to check out our guide onbest time to trade forex in Nigeriaas the opportunities to make profits are higher during certain market hours.
Another major benefit is that forex trading allows you to trade in a wide range of currencies from around the world. This includes the traditional major currencies such as EUR and USD as well as exotic ones such as CZK and MXN.
There are certain risks attached with forex trading, which you need to be aware of.
Forex brokers offer very highleverage, as high as 1:1000 in many cases. This means that you can place $1000 worth of trade in the market with just $1. Using very high leverage puts your trading capital at huge risk of depleting very fast with even a single bad trade. Ex: Lets say that you deposit $100 in your trading account, and you use 1:1000 leverage to place a 1 standard lot buy trade on EUR/USD. In this example, you can lose your full capital if the price goes just 10 pips against you.
We advise you to use proper risk management & never risk more that 5% of your trading accounts balance on a single trade
There are so many forex brokers out there that lack transparency & are not even regulated. You should definitely avoid brokers that promote get rich quick schemes. Be wise enough to choose a broker that is regulated by Government bodies like FCA, CySec etc, has years of experience, must have good reviews & is transparent in their dealing of any issues.
There are a wide range of factors which can influence the value of currencies (causing extreme volatile, especially for the non-conventional currency pairs), not limited to political or macro & micro economic factors. And unfortunately, you cannot control these factors. So it is really important to watch out for any news before placing or closing a trade & have strict stop loss limits in place to control any losses in case of bad event.
Lets face it, forex trading can be extremely challenging emotionally. One bad trade can result in big losses & dealing with losses can prove to be very difficult. This can be emotionally stressful for you.
How you can manage these risks?Be cautious, have a fully tested trading strategy (on demo) and use good risk management to be successful at forex trading.
At Forextrading.NG our ultimate aim is to help you choose the best broker for your needs. We have tested all the Top Brokers in Nigeria to give you unbiased reviews & comparisons. Dont choose any broker without going through our Top list.
We have also created tools, guides to help you learn & successfully trade forex.
Contains all the tips, resources and case studies found here
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