Forex Trading in Nigeria

October 17, 2017 | Forex Brokers

For the second consecutive year, Nigeria has been the fastest growing market for retail forex trading. The industry is seeing a stable growth rate around the world, especially in Africa and Asia, but among all countries Nigeria is growing at the fastest pace.

What makes forex trading so attractive to Nigerians? Will the country continue to grow its number of traders in the following years? What brokers do Nigerians use most? We'll try to answer these questions in this article.

Nigerian Naira and why Forex matters in Nigeria

To better understand why Nigerians are so keen to embrace forex trading, we have to start with the national currency, the Nigerian Naira (NGN) and the way it has shaped the everyday life of Nigerians. Until the Global Financial Crisis of 2008 one US dollar was worth around 117 Naira and the exchange rate was kept stable by the Central Bank of Nigeria (the value of the Naira actually improved compared to the US dollar from 2004 to 2008). People did not have to worry about exchange rate fluctuations as the national currency was perceived as safe. But in early 2009 the Central Bank was forced by the international circumstances to devalue the Naira by 25% in only two months, resulting in a rate of 147 Naira for one US Dollar. People lost a quarter of the value of their money in only two months because of the exchange rate devaluation, and those who kept US Dollars instead of the national currency were shielded from the devaluation.

Such exchange rate movement makes people aware of the realities of the forex market and of the potential winnings that can be obtained trading currencies. If someone would have bought US dollars with all his Naira before the devaluation, and bought back his Naira two months later, he would have made a profit of 25% in only two months. And we're talking about dealing with zero leverage.

The Naira was kept stable for another five years, going from 147 to only 165, which translates into a devaluation of 2% per year. However, in late 2014 Nigerians were reminded again about the importance of forex movements when the Naira lost another 20% of its value against the US Dollar in only three months, going from 165 to 199.

The Central Bank of Nigeria tried to calm the anxieties of its citizens in relation to the value of the Naira by keeping a fixed exchange rate of 199 NGN for one USD. But market forces are too strong to be ignored for too long. The Oil Price Crash had increased the pressure on the exchange rate to the point where the Central Bank had no other option but to let the Naira devalue again. From June to July of 2016 the exchange rate moved from 199 to 318 which represents a huge 60% devaluation in less than two months. Capital controls were imposed to limit the money that could be spent abroad and limit the USD outflows.

The Nigerians were spared only one year from further devaluations, as in August 2017 another 15% devaluation of the Naira sent the exchange rate from 314 to 364.

Singapore Financial District

Figure 1: USD/NGN 10 year chart (Image source: XE.COM)

The repeated devaluations of the local currency made the population extremely conscious about foreign exchange rates and how the currency markets work. People know their savings are not safe unless kept in a foreign currency such as the US Dollar or the Euro, and they also know that a lot of money can be made in the currency markets.

The day to day life of Nigerians has been affected by foreign exchange movements too many times, and this has resulted in a large number of people who understand well the forex market and are willing to start trading and make a profit out of it.

It may not be just a simple coincidence that the number of forex traders from Nigeria has started to greatly increase since 2016 and the trend is most likely going to continue for the foreseeable future, as Nigeria's population is very young and access to internet is growing rapidly.

Leverage - The reason why Forex is growing so fast in Nigeria

Investing in the stock markets is the most common way for people to invest their money for retirement in developed countries. This way, people hope to increase the value of their savings over a period of many years while taking limited risk. It is a wise choice when your savings are in the tens of thousands of dollars every year. In wealthy countries such as the United States or Switzerland, many families can afford to save 20,000 dollars per year for retirement. If they do so for 30 years, they can save 600,000 dollars for retirement. If those money are invested in the stock markets, and the value of the investments slowly grows during the thirty years, they can end up with the investments valuing triple the amount saved, resulting in a portfolio worth almost 2 million dollars at retirement. This is more than enough to live a comfortable retirement and also leave a nice inheritance to the kids. This is why investing in the stock markets makes sense for people who can save large amounts of money on a regular basis.

The problem with such long-term and low-yield investments is the high capital needed in order to achieve substantial earnings. If you cannot afford to save large amounts of money, low-yield investments will generate too little profit and are not a solution for achieving the much needed financial independence. If you can invest only 1,000 dollars, you can't earn much by owning stocks and bonds. This is why in less wealthy countries people tend to look for alternative opportunities to multiply their money at much faster rates. This is where leverage comes into play.

Trading forex is done through the use of Contracts For Difference (CFD). The forex brokers will only require a margin deposit that covers the potential loss of your operation, instead of charging the full amount traded. For example, an operation that uses a leverage of 1:100 will require only 1% of the traded amount as collateral. This means that a deposit of 100 dollars will allow you to buy Euros worth 10,000 dollars if you are trading using 1:100 leverage.

Forex brokers know that currencies move slowly, and in a day the price rarely moves more than 1% in the case of high traded currencies such as the US Dollar, Euro, Japanese Yen, British Pound or Canadian Dollar. This is why the brokers give leverage to their traders. The brokers make more money when their clients trade large volumes, because their commissions are proportional to the volumes traded. Because of that, the brokers want to give their clients the chance to trade larger amounts, as long as they can cover their potential losses with their margin balance. Based on historical volatility for various currency pairs, forex brokers have determined what are the leverage ratios that are safe to provide for their clients. This means that when trading EUR/USD the broker will give you higher leverage compared to the trading of a high volatility pair such as USD/RUB.

Most forex brokers offer at least 1:200 leverage for smaller accounts (those with less than 10,000 dollars in their balance). This is because they want even their smaller clients to trader high volumes. By using leverage, a trader can decide how much he wants to risk and how much the potential profit will be. You can double your money in a single day, but you can also lose your entire balance in the same amount of time if you use excessive leverage. It is all up to the trader to decide how much money he is willing to win/lose in a small time frame.

Nigerian traders are using leverage to their advantage, because they can aim for higher profits without having to deposit large amounts of money. Because of high leverage, forex trading is accessible to everyone, as you can deposit amounts as low as 10 dollars and experiment with the broker's platform and learn how to become a better trader. Many Nigerians have started with low amounts and once they mastered forex trading they increased the stakes to increase their profits. High leverage brokers offer an unprecedented opportunity for Nigerians to trade on the forex market even if they lack the money to finance large forex trades. A mobile phone with an internet connection and as low as 10 dollars are enough to test the forex market nowadays.

Forex Brokers in Nigeria

In order to trade on the forex market, Nigerians need to choose a broker. Currently there are no forex brokers based in Nigeria, but this didn't reduce the appetite of Nigerians for trading forex, as all the major international forex brokers accept traders from Nigeria. This gives Nigerians a wide range of options when it comes to the broker they want to use. Going with one of the highest rated forex brokers in the world will be a natural choice for most people.

Here are some of the most sought after features of forex brokers by Nigerian traders:

• High leverage of at least 400:1

• A low minimum deposit amount

• Good mobile trading platform

• A wide range of deposit and withdrawal methods

• The possibility to have a broker issued debit card

• Low spreads and a wide selection of currency pairs

• Oil and Gold trading as well as Contracts For Difference on major stock indices and individual shares

Some of the major forex brokers are actively targeting the Nigerian market and have a large number of clients from Nigeria. Current data shows that the following brokers have the largest number of Nigerian traders, meaning they are the most popular forex brokers in Nigeria:

1) XM.COM

2) Hot Forex

3) Ava Trade

4) FX Pro

5) Pepperstone

All of them are very high rated brokers, which shows again that Nigerians have done their due diligence when it comes to selecting a broker and are trading with some of the best companies in the world.

Conclusion

Forex trading is getting very popular in Nigeria with thousands of new traders joining the ranks every month. A combination of mobile trading platforms, high leverage and low minimum deposit requirements have made the forex market accessible to everyone. A mobile phone connected to the internet and as low as 10 dollars are enough to get someone started into forex trading, so it is no surprise that as more people find out about forex trading, the number of traders grows as well.

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