6 important things to consider before trading Forex

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Forex or foreign exchange is the largest capital market in the world. The average daily volume of transactions in the foreign exchange market is over 6.6 trillion USD. This is much more than the average daily volume of transactions on the global stock markets.

The significant increase in the number of forex traders since the start of the COVID-19 pandemic has dramatically increased trading numbers, with most brokers reporting their highest trading volumes in 2020 and 2021.

Nigeria, South Africa and Kenya are the countries that have seen the largest increase in the participation of retail traders in Africa.

One of the main reasons for the growth is the ease of access with which these trading apps are available. A significant percentage of young traders have traded currencies and other instruments through mobile apps.

Forex currency pairs are available for trade in Nigeria through various online forex brokers. These brokers offer easy to use trading platforms and applications for beginners with an interface that encourages trading. This is not really a good situation as it also promotes reckless trading.

Moreover, due to a substantial increase in demand for online forex brokers, scammers and con artists have also taken the opportunity to scam uninformed and inexperienced traders. Forex trading scams are at an all time high across Africa and there are some aspects that traders need to consider before choosing a forex broker in Nigeria.

Here are some things to consider before trading forex.

Retail forex trading through online brokers is not regulated in Nigeria.

The Securities and Exchange Commission of Nigeria (SEC) has issued several warnings about the risks of currency trading. However, it is not illegal to trade CFDs and currencies online in Nigeria.

Currency trading in Nigeria is not illegal, but traders do so at their own risk. As forex is not yet regulated in Nigeria, people involved in forex trading need to take more precautionary measures and choose wisely.

No local regulatory authority in Nigeria regulates or neglects the forex market and the activities of currency brokers. Some major forex brokers in Nigeria have regulations from leading authorities like FCA UK, FSCA South Africa and ASIC Australia. However, some forex brokers in Nigeria do not have a regulatory license or are only licensed through offshore regulators. Such unlicensed offshore brokers are more likely to be bogus and should be avoided.

In the absence of regulation in Nigeria, regulation of the broker by leading regulatory authorities ensures the safety of your funds. Any professional misconduct or complaint against a regulated broker can be reported to the regulatory authority.

Previous records of registered complaints can also be verified for regulated brokers. Each forex broker regulatory license will have a license number which can also be verified with the regulatory authority to verify its authenticity.

Trading forex in Nigeria through an offshore broker can be very risky as no complaints can be made in the event of deception. This greatly increases the risk of third parties, which makes forex trading even more risky.

It is important to look at the types of scams that have been committed against investors in Nigeria. The recent MBA Trading Limited scam estimated to have cost unsuspecting investors billions of naira.

Most of these scams in general have nothing to do with forex and other capital markets, but are con artists and con artists who deceive inexperienced investors.

Foreign exchange and cryptocurrency-related scams are at an all time high in Nigeria. Traders should take all possible measures to avoid falling into the traps of scammers.

Many bogus agents or brokers can reach you with unsolicited investment advice and force you to make quick deposits. They can earn your interest by promising unrealistic returns and illogically low risk factors. Traders and investors need to know where their hard earned money is going and what the risks are associated with it.

Traders and investors in Nigeria should ensure the authenticity of the regulatory license held by the broker. The chosen forex broker must have at least a leading regulatory license. This greatly reduces the risk of broker scams and provides security.

In addition to verifying the license, traders should also stay aware and look for red flags of a scam. Common red flags include postponing withdrawal, being forced to buy or sell, changing fees, requesting too many documents, etc.

Forex transactions can only be executed with one currency pair. One currency in the pair is bought and sold while the other is traded in exchange for buying or selling the pair.

For example, in the EUR / USD currency pair, the EUR can be bought or sold in exchange for the USD. Or vice versa.

The price movement in each of the currency pairs depends on different factors which need to be analyzed fundamentally and technically. All the factors that can affect the prices of currency pairs should be fully understood before dealing with them.

Micro and macroeconomic factors, geopolitical factors, inflation and many other aspects of countries should be considered before trading a currency.

Many new entrants to the market look for the most volatile currency pairs to generate quick returns or the ones that are most traded or suggested by someone. Currency pairs in forex trading should only be selected after detailed inspection and analysis of price movements. Trading with unfamiliar instruments without analysis and understanding is similar to gambling with a high risk of losing.

Leverage is a feature offered by forex brokers that allows traders to open a larger position with a smaller deposit. This allows them to get high returns, but if the price moves against the anticipation, the loss can be very serious.

In many situations, traders can lose all deposited amounts due to high leverage. The amount required in the account to open a position is called margin money.

For example, a broker offers leverage of 1: 500 in Nigeria. To open a buy position on 1 standard lot (i.e. 100,000 units) the trader only needs $ 200. If the price goes up 10 pips the profit will be $ 100, but if it goes down 10 pips the loss will be $ 100 or 50% of your equity.

Some brokers offer negative balance protection in which positions are automatically closed if the account balance reaches zero. Trading with brokers who do not offer protection against negative balances is riskier as the account balance can turn negative.

Higher leverage can increase profits with lower deposits, but it also increases the risk factor exponentially. Leverage in forex trading should only be used with a good understanding of its consequences, and you should never use leverage greater than 1:20 in forex.

Forex trading requires planning and a lot of research. Experienced traders always follow a trading strategy and continue to improvise it to increase success rates and earnings when correct in their analysis.

Trading without a plan or strategy is similar to finding treasure without a map. Trading without planning is a very high risk game due to the leverage effect.

Analysis of forex price movement can be done both fundamentally and technically. Using analytical techniques can provide better trading ideas and increase trading success rates.

Traders in Nigeria need to make a financial plan with a realistic goal and develop strategies that can help achieve the goal. Most new traders, unlike experienced traders, lack the discipline to follow a particular strategy or trading plan.

Traders need to stay emotionally strong and make decisions based on financial goals and analytical judgment. Emotionally motivated trading decisions or unsolicited advice should be avoided.

You should not choose the broker or the trading instrument just because your friend or family member has chosen them.

Strategies can be developed and tested before implementing them with real money.

Most forex brokers and fintech websites offer a demo forex trading account where new and experienced traders can test their strategies with virtual currency.

These demo accounts are available for free and can also let traders know which market or instrument is right for them. The demo account can also help you learn and understand basic terminologies, use risk management features like stop-losses, limit orders, etc.

The risk involved in the capital markets and the possible amount that can be won or lost can also be calculated.

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