Forex Trading in Nigeria.
Retail Forex Trading via online CFD brokers is not illegal in Nigeria, but it is still unregulated.
You can trade forex via foreign regulated forex brokers in Nigeria like Hotforex, Exness etc. that are regulated by Tier-1 & Tier-2 regulators FCA, ASIC & FSCA. In this guide we cover all the basics of forex trading for beginner traders in Nigeria.
You should carefully read this guide to learn the risks of CFD trading before you start, especially if you are a beginner trader.
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Featured Forex Brokers.
Here are our best-rated forex brokers for Nigerian traders. We have listed these brokers after checking out all the popular brokers in Nigeria & then comparing their – spread (and non-trading fees), regulations, local funding & withdrawal methods, platforms, support & 8 more factors.
Last Updated March 29, 2022.
In this guide, we will explain everything that you need to need about trading forex in Nigeria.
We will start from what forex trading is, to its risk & how you can start. Reading this full guide would take about 30 minutes and you will get to learn everything that you need to know about forex and CFD trading in Nigeria.
Understand what is Forex Trading Learn how the Currency Trading market works Know the forex trading terminologies & basics Open a Forex Trading Account with a broker in Nigeria Test the forex trading strategies on Demo Continue to trade on demo & only fund your live account when once you are profitable.
What is Forex Trading & How does it work ?
Are you interested in the economics of a country? Possess knowledge on factors affecting the GDP of a nation on a micro as well as macro-economic level? In that case, trading in the forex markets can be an option for you as a trader.
Forex markets involve the highest volume of trading with the use of margin. Forex trading involves buying and selling a currency in return for another, hence each currency pair has two currencies.
For example, let’s assume that 1 USD = 500 NGN, in this case, the value of one currency (USD) is calculated in terms of another currency (NGN). Here NGN is the “base currency”, USD is the “quote currency” and the currency pair is NGN/USD.
Generally, the stronger or less volatile currency takes the position of quote currency and vice-versa. In this case, the FX Rate quotation will be NGN/USD = 500. Forex trading has its uses starting from retail investors, pension funds, global banks, governments, and major corporations.
If a trader takes a long position on an NGN/USD pair, it means that the bet is on the strength of USD against NGN, if the value of USD increases in terms of NGN, the currency pair’s price moves higher. On the other hand, when the USD value is expected to decrease in terms of NGN, the trader takes a short position.
Forex Markets are used heavily to hedge and are a key component in different derivative products. For example: If a retailer has payments to be received in a foreign currency and is expecting that the FX pair value will go south in a couple of months, they usually buy FX contracts to lock in the FX rates and get guaranteed amounts at the mentioned payment dates.
We will learn more about the usage and market mechanism of Forex Markets in later parts of this guide.
How International Currency Markets work ?
In the International Forex Market, the average daily trading volume is nearly 6.6 Trillion USD. In layman’s terms, any transaction that is span across borders or countries involves the International currency market. The currencies need to be exchanged for every transaction across the border of a country.
For example, if you want to visit Europe, being a Nigerian, you will need Eurodollars to purchase, travel, or even to stay in Europe. This is facilitated usually by a Bank that can convert the NGN held by the traveler to EUR dollar at the prevailing FX rate of NGN/EUR on the given date.
This is applicable vice-versa too. There are many non-residents across every country, who send funds to their loved ones back at home. This is possible only due to international currency markets.
Large capital investors require FX markets too, for investing in the country’s financial markets or businesses. These are just a few examples of FX markets usage, there are plenty more.
History of Forex and its importance:
The forex market can be termed as one of the oldest existing markets, at least its existence is supposed to date back 2500 years ago. Greeks and Egyptians started to trade silver and gold coins based on their actual weight and size.
500 years post the first event, the Roman empire started minting coins on a centralized basis and started currency trading accordingly. 500 years ago, the first forex market was built in Amsterdam. This was one of the key moments for Forex market history, as currencies were freely traded to stabilize currencies across the world. This then spread across the entire world.
Forex Trading firms had grown exponentially and continued to grow in all parts of the world. Today the most traded currencies are USD, EUR, JPY, and GBP (arranged with highest to lowest volume). Important historical events for FX Markets would include the Bretton Woods conference held in 1944. It was a group of 44 countries coming together to decide that the USD would be the back of the present-day FX markets and gold can be valued in USD terms.
At that point in time, 1 ounce of gold was agreed at USD 35, today it trades at around USD 1900! Policies including the Smithsonian agreement and Plaza Accord led to depreciation of the USD against all currencies in the free float market. This went on till the 1990s until Internet Trading started wherein anyone with the help of a few clicks started to trade currencies and not only the top 5 but every other legal currency too. With more and more trusted participants joining forex trading, this became a very robust asset class and is now pegging at USD 6T transactions each day. We will now understand how these currencies are traded in the current forex markets.
How are Currencies traded ?
The modern FX market is driven by financial derivative instruments that are used by traders and investors. ranging from FX futures, forwards, options and even CFDs. There are majorly 4 types of transactions that take place in forex markets and we will discuss them all briefly:
Spot Transactions.
Spot basically means immediately. Forex traders are involved in spot transactions when currency pairs are bought or sold in the market at “spot prices” and the delivery is usually within 2 days. The asset being traded using the spot rate is usually a future, forward, or option contract.
Given the rate is uncovered at the current market situation, liquidity is high, and placing orders with less spread between the bid and ask price is expected.
Forward Transactions.
As the word indicates, Forward transactions involve the trading of currency pairs using forward rates that are deliverable at a future date. The future price fluctuation is locked in such transactions benefitting buyers in case of high volatility.
Forward transactions have issues of liquidity when compared to spot markets. However, given that rates are locked it helps in case a trader wants to lock the price for an extended period with the help of a “roll” feature available for such contracts.
Swap Transactions.
If Party A requires AUD currency while residing in Europe and Party B requires EUR currency residing in Australia, they would want to indulge in a currency swap transaction. This basically leads to Party A paying AUD to Party B in exchange for EUR, so that both the parties can fulfill their needs.
Usually, these transactions are over the counter, which basically means the trades are directly done between the parties without any intermediary. They can be marked-to-market, in which values the amounts exchanged are equalized using the AUD/EUR FX for an agreed date.
Option Transactions.
Similar to futures contracts, option contracts are traded on exchanges with the underlying of an FX currency pair. Whenever the price of the currency pair moves high or lower, the contract value moves accordingly. Options are heavily traded in the markets given the low initial payment required in the form of a premium. Most corporates and banks use FX option contracts to hedge their bets in other asset classes using exotic option products which limit losses for investors while providing the benefit of market price action.
What is an exchange rate? How do Prices of Currency Pairs Move?
As previously mentioned, exchange rate is the rate at which 1 currency can be bought in terms of other currency. However, it is very critical to understand why the rate is pegged at a current rate and why does it move in the first place?! Let us understand briefly the 5 main factors listed below briefly:
Inflation – Inflation is the rate at which the prices of goods and services increase. If the Inflation of a country levels the highest rates, this is a growing concern for its economy as this signals the lack of GDP produced by a country as well as weakening demand for its country’s products. The country is dependent on imports from other countries or has a failed economic policy in place.
Interest Rates – Inter-linked to the above point, interest rates are the rate at which the central bank allows its banks and financial institutions to lend the country’s population. If it goes high, it implies excessive money circulation in the market. Usually, interest rates have an inverse relationship with the country’s inflation rate and hence are critical for a country’s economy.
Monetary Policy and implementation – When the central bank of a country announces its monthly or quarterly reports, markets become volatile. The reason behind the same is the faith that the market has in the central bank of each country and its concrete decision-making ability for the sustainable growth of the country’s economy. When Godwin Emilie (Nigerian Central Bank Governor) announces the inflation rates or country import/export results, markets usually react to the news.
Geopolitical stability – When Venezuela started going through a crisis after the oil price crash, it became very evident that the country’s economy is in deep trouble. The country started having street fights and riots in protest and is still one of the poorest Latin American countries. This had a massive impact on inflation and hence the Venezuelan bolivar crashed to record low levels of economic depletion. Now, 1 USD = 355 billion VEF. Therefore, it is very important to know the stability of a country’s economy and how it affects the exchange rate of the country’s currency.
Import/Export – When the country’s export increases in comparison to imports, it helps in strengthening its economy and thus the forex exchange rate. More the produce of export means more is the amount of profit/capital available to spend in the country for growth purposes and hence the increase in FX Rates. This is very crucial and import/export reports often get the market excited about future outcomes.
Apart from the above-mentioned major factors, the prices of currency pairs can move due to several other reasons. The forex market is active 24 hours a day and it is nearly impossible to identify or predict each and every price movement.
Important terminology of Forex:
Now that we have understood the main factors affecting forex markets and the types of transactions taking place, we will move on to understanding the basic terminologies of the market in a minimalistic way.
Currency Pair – Currency Pair defined is the combination of two currencies clubbed as a pair which numerically defines what is the worth of one currency when valued against the other. USD/NGN, as well as NGN/USD, are both valid currency pairs. However, the values will be inversed whenever we inverse the currency pair numerator and denominator.
Base & quote currency – Base currency is the currency that sits in the numerator and quote currency sits in the denominator while FX calculation. For example, USD/NGN, where USD is the base and NGN is the quote currency. So, we will the NGN in terms of the USD. Here 1 USD = 411 NGN. On the other hand, in the case of NGN/USD, the components are completely inverse. Here 1 NGN = 0.0024 USD.
Major/Minor/Exotic currency – The market is split across many different types of currency pairs. Any pair which contains USD and a developed market currency is considered a major currency. Example – EUR/USD, USD/CHF, GBP/USD, JPY/USD, etc.
Any other developed currency which has high market liquidity but doesn’t contain USD in the currency pair, for example – EUR/GBP, EUR/JPY, JPY/AUD, NZD/GBP, etc are considered minor currencies. Exotic currencies on the other hand are emerging market currencies, which are less liquid and more volatile, therefore these are non-deliverable currencies. Non-Deliverable currencies are those currencies that cannot be transferred or delivered in a financial transaction while trading futures, forwards or options. This is mainly due to the instability and higher downfall probabilities in those currencies. Examples are ZAR, MXN, TRY, INR, MYR, etc. One thing to note is more developed a country, the smaller becomes the range for fluctuation of that country’s currency in forex markets.
Pips – Pips or Percentage in points reflects the smallest amount of change in forex rates. Usually, 1 pip represents a 0.0001 change in the price of a currency pair. So, 1 pip is equivalent to 1/100th of 1% move in a currency. It is kept this low for easy conversion and allows traders to take advantage of the smallest price movement.
Leverage – Leverage is a facility provided by brokers and liquidity providers while trading forex using financial instruments. Here an investor can purchase or sell instruments in multiples of money initially invested. For example – one can buy 1 standard lot of EUR/USD CFD contracts by investing USD 1000 whose market price is USD 5000. In this case, leverage is 5 times or 5x = 5000/1000 = 5. However, leverage varies from broker to broker, so it is better to know the leverage ratio beforehand.
Bid/Ask Price – Bid and ask price to represent the buy and sell price of an asset in the market accordingly. The bid price is usually less than the ask price which is usually higher. The psychology of the market is to buy as low as possible and sell as high as possible. Therefore, forces of bidders and askers in the market to drive market trends.
Spread – The difference between the bid and ask price of a financial instrument is known as the spread. If the bid price is 1.1753 for EUR/USD and the ask is 1.1755, then the spread is 1.1755-1.1753 = 0.0002 or 2 pips. Higher the spread, lesser is the liquidity of an instrument. If a market has 0 spread as there is always a difference between the bid and ask prices.
Lot Sizes – Lot size is usually the number of underlying assets comprising the Nominal and the FX rate. Take for example: 1000 units of the EUR/USD FX pair cost 1.1753*1000 = USD 1753. The minimum units are defined in the contract. Usually, it is 1000 units but can also start with 10,000 units in case of forward contracts.