The foreign exchange market is more commonly known as the forex market. It is the financial market involved with the trading of currencies. It is the largest financial market in the world where trading volumes of more than $5 trillion occur daily.
These trades are executed over the counter, more commonly referred to as OTC. This means that transactions are executed around the world through online computer networks. In addition to being the largest market, the forex market is also the most liquid and volatile.
Liquidity refers to the ease with which an asset or a security can be converted into cash without it affecting its market price. Market volatility refers to the velocity of price changes which occur in any market.
The liquidity and volatility of the market is as a result of the significant amount of forex trades which occur daily and higher liquidity also results in lower transaction costs, a benefit for all traders.
Nigerian traders have access to the forex market 24 hours a day, 5 days a week, with the added benefit that trading can be done despite the trader’s time zone. This due to the fact once one market closes, another will open while some are open due to the overlap in time zones.
When considering forex trading specifically in Nigeria, forex trading has become easier in the country. The past decade reflects substantial economic growth as well as an increase in disposable income.
Nigeria is one of the most prosperous countries in Africa and it is believed that Nigerian forex traders trade positions worth at least $1.25 million on average every day.
There are also more brokers that are welcoming Nigerian traders in registering an account on their platform, allowing beginners and experts to connect to global markets.
The Basics – What all Beginner Nigerian Traders Must know
One of the most common mistakes that beginner traders make often is not ensuring that they have adequate forex trading knowledge. Before approaching the forex market, Nigerian beginner traders must ensure that they consult adequate educational resources to build up their knowledge.
One of the most basic areas to begin is learning common forex terms and their definitions. This will help Nigerian traders understand the forex ‘jargon’ that they will be exposed to from the get-go when they start trading.
Some of the terms that traders are more likely to see include the following:
- Base currency – this refers to the currency that the trader is currently holding, in this case, the Nigerian Naira. The base currency always appears first in a currency pair.
- Quote currency – this is the currency that the trader will purchase. The quote currency always appears second in a pair.
- Bid/Ask Price – the bid price refers to the price at which the broker is willing to buy the base currency. The ask price is the price that the broker will ask the trader in exchange for buying the quote currency of choice.
- Spread – the spread is the difference between the bid and the ask price which is expressed in pips. The spread is charged by the broker as payment for rendering services. There are floating/variable spreads which change with market conditions and fixed spreads which are determined by the broker.
- Pip – this stands for ‘Percentage in Point’. It is the smallest measurable value of currency movements and the smallest increment that a price can move. One pip is equal to 1/100th of the base currency of the trader.
In addition to this, another imperative educational tool is a demo account. Numerous brokers offer them to traders. A demo account provides a risk-free platform to traders where they can practice trading in an environment which mimics live trading conditions, without risking actual capital.
Why you should develop a forex trading plan
All traders who intend to be successful have a trading plan. It consists of a set of rules and guidelines that shapes and defines the trading behaviour of a trader.
Nigerian beginner traders must ensure that they evaluate their needs, goals, and limitations before they start trading. This will ensure that they do not give in to emotional or chaotic trading and ensures that they have a clear goal and objective in mind.
Trading plans also help traders manage their risks more effectively.
How to choose a trading strategy
Once Nigerian beginner traders have a better idea of what they want to achieve through their forex trading and what they are limited to, they can start looking at the different forex trading strategies to use when trading, or they can develop their own.
The trading strategy must be chosen according to the trading style of the trader and it must be in line with the trader’s trading plan. One of the main considerations when choosing a trading strategy is the personality of the trader.
This is because it will be assessed by performance as well as quality of historical data, and the implementation of the strategy. Factors such as time management, dedication, commitment, patience, and others are imperative when choosing a strategy.
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How to choose the right forex broker
When Nigerian traders start considering a broker to facilitate their trades, there are key factors to consider, including:
- Knowing your needs as a trader such as education, research, trading strategy provision, trading tools, and more.
- Regulation – beginners must ensure that they only deal with regulated brokers to ensure the safety of their funds
- Fees and commissions – Traders must ensure that they understand their financials and what they can spend and afford to lose. Here, traders must consider the trading and non-trading fees.
- Testing the broker’s platform by opening a demo account.
- Make sure that the broker offers adequate education and research.
- Look at the ease with which funds can be deposited and withdrawn.
- Test and evaluate the level of customer service.
What drives the forex market and why is observation important?
When traders start out, they must realize that there are factors that drive the prices and exchange rates in the forex market. These include, but is not limited to:
- Central Banks
- News Reports
- Mark Sentiment, and numerous others.
By staying up to date with news and other reports, traders can more effectively begin to anticipate what the market may do while making extensive use of both fundamental and technical analysis to assist them in trading decisions.