Introduction to Forex Trading in Nigeria
Foreign exchange (Forex or FX) trading is a booming industry globally, and Nigeria is no exception. As Africa’s largest economy, Nigeria presents a dynamic environment for forex trading, with increasing participation from retail traders. This guide aims to provide Nigerian beginners with essential knowledge and steps to start their journey in forex trading.
Understanding the Forex Market
The forex market is the largest and most liquid financial market in the world, with an estimated daily trading volume of over $7.5 trillion. One of its biggest advantages is its 24-hour operation, allowing traders to participate at any time from Monday to Friday.
How the 24-Hour Forex Market Works
Forex trading operates in four major sessions, with some overlapping periods that create high liquidity and volatility:
- Sydney Session (11 PM – 8 AM WAT): This is the first market to open after the weekend, mainly affecting the AUD (Australian Dollar) and NZD (New Zealand Dollar) pairs. Liquidity is relatively low.
- Tokyo Session (1 AM – 10 AM WAT): The Tokyo market brings more activity, especially in JPY (Japanese Yen) pairs. Japan is one of the largest forex hubs in Asia.
- London Session (9 AM – 6 PM WAT): This is the most liquid session since London is a global financial center. The London session sets the main market trends for the day.
- New York Session (2 PM – 11 PM WAT): The second-largest trading session, heavily influencing USD (U.S. Dollar) pairs and commodities like gold. Volatility is high, especially when the London and New York sessions overlap.
Decentralization and Over-the-Counter (OTC)
Fore trading Unlike stock markets, which have central exchanges (like the New York Stock Exchange), forex operates over-the-counter (OTC), meaning:There is no single exchange controlling the market.Trading happens electronically through a global network of banks, brokers, and institutions.Liquidity providers (big banks) set bid/ask prices for currency pairs.
Retail traders access the market via brokers who act as intermediaries.
The Role of Major Trading Centers
The forex market revolves around four key financial hubs
- London – The largest forex hub, accounting for about 35% of global forex trading
- New York – The second-largest, influencing USD-based currency pairs, stocks, and commodities
- Tokyo – Dominates Asian markets and plays a key role in JPY movements
- Sydney – The first market to open, impacting AUD and NZD pairs.
Impact of Market Overlaps
Some trading sessions overlap, leading to increased trading volume and volatility
- London-New York Overlap (2 PM – 6 PM WAT): The busiest and most volatile period of the day, with high liquidity
- Tokyo-London Overlap (8 AM – 9 AM WAT): A short overlap that can impact JPY pairs and create early momentum.
The forex market’s 24-hour structure and decentralized nature make it unique. Smart traders take advantage of market overlaps for high liquidity and volatility, while institutional players ensure smooth price movements. Understanding these trading sessions and their timings in West Africa Time (WAT) can help traders make more informed decisions.
Key Concepts in Forex Trading
1. Currency Pairs
Forex trading involves trading currencies in pairs, where one currency is exchanged for another. Each pair consists of
- Base Currency: The first currency in the pair (e.g., EUR in EUR/USD).
- Quote Currency: The second currency in the pair (e.g., USD in EUR/USD).
The exchange rate tells you how much of the quote currency is needed to buy one unit of the base currency.
For example, if EUR/USD = 1.1000, it means 1 Euro (EUR) = 1.10 US Dollars (USD).
Types of Currency Pairs:
- Major Pairs: These involve the USD and are the most traded pairs, such as EUR/USD, GBP/USD, USD/JPY, and USD/CHF.
- Minor Pairs (Cross Pairs): These do not include the USD but involve other strong currencies, such as EUR/GBP, GBP/JPY, and EUR/AUD.
- Exotic Pairs: These include one major currency and one from an emerging economy, such as USD/ZAR (US Dollar/South African Rand) or EUR/TRY (Euro/Turkish Lira).
Pips and Lots
What is a Pip? A pip (Percentage in Point) is the smallest price movement in a currency pair.Most currency pairs are measured to the fourth decimal place (0.0001).Pairs with JPY (Japanese Yen) are measured to the second decimal place (0.01).
Example:If EUR/USD moves from 1.1000 to 1.1005, that is a 5-pip increase.If USD/JPY moves from 145.50 to 145.55, that is a 5-pip increase.
What is a Lot?
A lot refers to the trade size, and different lot sizes affect profit and loss per pip movement. The most common lot sizes are
- Standard Lot: 100,000 units of the base currency. 1 pip = $10 on USD pairs
- Mini Lot: 10,000 units of the base currency. 1 pip = $1 on USD pairs
- Micro Lot: 1,000 units of the base currency. 1 pip = $0.10 on USD pairs
- Nano Lot: 100 units of the base currency. 1 pip = $0.01 on USD pairs.
Example:A 1 standard lot trade on EUR/USD moving 10 pips would result in $100 profit or loss.A 1 mini lot trade would result in $10 profit or loss for the same 10-pip movement.
3. Leverage and Margin
What is Leverage? Leverage allows traders to control a large trade size with a small amount of capital. It is expressed as a ratio, such as 10:1, 50:1, 100:1, or 500:1.
For example:
10:1 leverage means you control $10,000 with $1,000 in your account.
50:1 leverage means you control $50,000 with $1,000 in your account.
100:1 leverage means you control $100,000 with $1,000 in your account.
500:1 leverage means you control $500,000 with $1,000 in your account.
Higher leverage increases both potential profits and risks, making it a powerful but dangerous tool if not used wisely.
What is Margin?
Margin is the amount of money required to open a leveraged trade. It acts as a security deposit held by the broker.For example, if your broker requires a 1% margin, and you want to control $100,000, you need at least $1,000 in your account to open the trade.
Margin Call and Stop-Out Level
Margin Call:
A warning that your account balance is too low to maintain open trades.
Stop-Out Level:
If your margin drops below a certain percentage (e.g., 20%), the broker will automatically close your trades to prevent further losses.
Understanding these forex concepts is crucial for successful trading.
To summarize: Currency pairs are classified as majors, minors, and exotics.
Pips measure price movements, and lots determine trade size.
Leverage amplifies potential profits and risks, while margin ensures you have enough funds to sustain your trades.
Mastering these basics will help traders manage risks effectively and make informed trading decisions.
Next we will be talking about understand the MT4/MT5 app
