The COVID-19 pandemic saw many Nigerians turn to day trading in stocks & forex market for additional income. As per data by NGX, the total volume of Equity trading in the NGX by domestic retail traders stood at N578.12 billion in 2021 & it is almost 30% of the total volume on the exchange in 2021.
Similarly, many forex brokers have reported their highest trading volumes in Africa in 2021. Retail day traders have been pouring into the markets.
But with several studies showing that about 80% of day traders lose money, is it really possible to day trade for a living?
We will discuss if you should be trading & if it is really sustainable in the long run. Also, some important points that you should consider if you are considering a career in day trading.
#1 Treat day trading like a day job
Some traders like the idea of making a living off day trading but then cannot make out time for day trading. If you intend to make enough money to sustain yourself and pay your bills then you need to be consistent and treat day trading like a job and not a hobby.
The market could change in the blink of an eye and you don’t want to be away when your attention is needed.
Also, if you treat it like any other career, then you will also learn everything there is to about the instruments that you are trading. This is really important, because without education, there is a high risk that you will lose if you are trading leveraged instruments like derivatives on margin.
#2 Find out what is allowed in your country
The Nigerian Exchange Limited (NGX) is the Nigerian Stock Exchange. They offer Equity derivatives, Currency derivatives, interest rate derivatives and Commodity derivatives for trading on the exchange floor.
Day traders in Nigeria have a lot of options to choose from. However, Nigerian day traders who trade in Securities should do so with regulated stock brokers. This is necessary to protect investors from the risk of losing funds to rogue brokers and also qualify them for compensation from the NGX’s Investor Protection Fund.
The Investor Protection Fund was established by the Investment and Securities Act of 2007. The fund exists to compensate investors who suffer monetary loss when trading with NGX trading license holders such as stock brokers. This loss could be due to reasons beyond the Investors control such as System glitch, broker insolvency, negligence on the part of the Trading license holder, defalcation on the part of the brokers staff etc.
The Foreign exchange market is regulated and this is where Banks source FX for their clients.
However, the retail Forex Trading in Nigeria is not regulated but there are many forex brokers operating in Nigeria, and they are doing so with foreign licenses. Since these are unregulated in Nigerian, be sure to check that your forex broker holds a license from a Tier-1 Country regulator such as Australia’s ASIC, UK’s FCA, BaFin in Germany, etc. This would reduce the third-party risk associated with the broker.
Forex trading is very popular in Nigeria as forex brokers operating in the Nigerian Market accept as low as $1 as minimum deposit and offer leverage as high as 1:2000. Also, they indulge in heavy marketing to attract new traders.
In the light if this, day traders in Nigeria are advised to self-regulate and not use excessive leverage to prevent excessive losses.
#3 Financial compensation
Don’t expect to make a lot of money daily. Some days will be bad.
Cut down your day-to-day expenses if you hope to live off day trading. Buy only things you need and try as much as possible to stick to your spending plan. If you have a family and children your expenses will be higher so you will need to generate more money from daily trading activity. This can put you under pressure and make you act emotionally.
As a day trader, you don’t have the technology and capital available to institutional traders, hence you would not make as much money as they do.
Most institutional traders have access to capital in Billions; hence they take lower risks & only intend to make 10-20% returns per year. But retail traders want to make millions with 10,000 Naira, and this is not possible.
You must be realistic about the possible returns, and have adequate capital to make that percentage of returns. For example, making N300,000 in a year with N1 million Naira capital is possible.
Being emotional while day trading is dangerous as it may lead to over trading, revenge trading, trying to average your positions and FOMO trading. If you have a lot of dependents/ family you need to realize that day trading may not generate as much profits as you may require to take care of a large family.
#4 Watch out for leveraged derivative products
Derivatives are financial products that derive the value from an underlying asset. The underlying asset can be Stock, Currency, commodities etc. Derivatives could be classified into:
- Exchange traded derivatives- like futures, options and swaps
- Over the Counter derivatives- like CFDs, and forwards and spread betting.
For a day trader who opens and closes positions same day, Contracts for Difference (CFDs) are popular over the counter derivative products that are used in Forex trading for speculation and hedging risk. These CFDs come with their own dangers if the trader does not self-regulate.
Let’s discuss the risks below.
(a) Risk of trading Stocks using CFDs:
CFDs are used to trade on the price increase or price decrease of an asset. CFDs are used to earn money in both Bull and Bear markets. If the trader feels the stock price will appreciate, he buys a CFD to profit from that rise in price. If he feels the price will fall, he sells a CFD to profit from that fall.
The difference between the price of the stock when the position is opened and the price of the stock when the position is closed is the trader’s profit.
Example:
A day trader studies GM Company stocks and predicts they will rise, he approaches his broker and orders 100 CFD contracts representing 100 shares of GM Company with detail below:
Price of GM stock= $50
Units of CFD ordered= 100
Total capital requirement= $5000 ($50 x 100 units)
Initial margin required by broker to be deposited by trader= 10% of total cost of stock
The trader will have to deposit $500 (10% of $5,000) as initial margin to gain control of $5,000 worth of GM stock. The broker lends him the balance of $4,500.
If the trader was wrong and the price of GM stock falls to $45 per share he is forced to close his position since day traders don’t hold positions overnight.
To close his position, he sells off the Stock for $4,500 ($45 x 100)
He has lost $500 and the broker squares off his position.
If the margin was higher than 10%, he would have lost even more than the $500.
This is the danger a day trader will face when trading CFDs with leverage or margin. As a day trader you have to decide how much leverage is good for you as some brokers may allow you leverage as high as 1:400.
These are some of the dangers a day trader will face while using derivative/leveraged products like CFDs.
Key takeaway: the higher the leverage/margin the higher the profit or loss. And most of the traders lose with margin. So, you must avoid using high leverage.
#5 Supplemental Income for new traders
When you first start out as a day trader it would be advisable to keep the pressure off yourself by having other sources of income. These could be real estate, stocks and other investments that don’t require your attention every day.
This helps keep you emotionally stable when you suffer losses. You will be consoled by the fact that you have not lost everything and you can still pay your bills. The mental health of a day trader is very important.
#6 Reinvest some of your earning in other less risky assets
If you make good income from day trading you may want to reinvest some of it in less risky asset classes. Always follow the 2% rule- never invest more than 2% of your capital on a single trade.
This helps in reducing the disappointment you may feel if you reinvest your wins and then lose everything. Day trading is very time-consuming and as soon as you make enough money from it, you may want to divest and reduce the amount of time you spend looking at the screen.
Important to know
Theoretically, it is possible to earn income from day trading if you educate yourself about the markets, and take calculated risks. But remember that more than 80% of the retail traders lose money, and it is very likely that you will also lose.
You must find a good broker who you will use to access the market and who will not charge you unnecessary fees.
You also need to have a good income from other sources, so you don’t put yourself under pressure if you lose. Use of leverage in trading should not be excessive and lastly, reinvest some of your earnings in less risky endeavours.
The write up is awesomely encouraging and educating….Thank you and well done 👍
It seems the day trading is getting better nowadays, So many platform to choose from and the local banks transfer. And patience must be one of the weapons in a trader arsenal? Thank you for this eyes opened opportunity.
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