Whenever you buy anything from abroad, like an imported smartphone from China, a forex trade is happening on the background, where US Dollars are being paid for the import of these goods. 

Similarly, whenever an exporter in Nigeria sells commodity like Oil to a foreign buyer, they are dealing in the forex market.

What is Forex Trading

In simple terms, Forex Trading is the exchanging of one currency for the other. Currencies are bought and sold against other currencies all the time. 

As an example, when you travel abroad, you are exchanging Naira for Dollar or other currencies.

Forex market is an Over the Counter 24 hours market. The price of a currency is determined by how one particular currency is in demand against another currency.

There are lots of currencies that get traded on the Forex market but there are mainly seven currency pairs that are regularly and largely traded. They constitute 75% of the entire Forex market. Here are the seven pairs:

• EUR/USD i.e., The Euro and US dollar
• USD/JPY i.e. The US dollar and Japanese Yen: 
• The British pound sterling and US dollar: GBP/USD
• The US dollar and Swiss Franc: USD/CHF
• The Australian dollar and US dollar: AUD/USD
• The US dollar and Canadian dollar: USD/CAD
• The New Zealand dollar and US dollar: NZD/USD

A large volume in the Forex market is from activities by banks and institutions like large businesses, hedge funds etc.

A sub-segment of the currency trading market is speculation, also known as Forex trading. A fraction of that is from Retail traders. 

A trader may buy or sell a currency to make a profit if he/she believes that the price of that currency will change. Normally this decision is based on technical analysis, day-to-day news as well as market sentiment.

For example, if a trader believes that the price of the British Pound would go up against Euro due to Brexit. He can buy GBP/EUR if he believes the price would go up.

Traders make money only if the currency they buy or sell moves in favourable direction. If the trader in this example buys the GBP/USD at 1.2000 and eventually the prices goes up to 1.2250, then the change in the difference of the price is the profit that the trader stands to gain. 

The problem that exists with the Forex market is that it is not as straightforward as it seems. Intricate and minute factors might trigger collapse of a currency and as a retail trader you will not be able to monitor all factors that can affect a currency.

If you are someone who is looking to trade forex, then the 5 steps mentioned below are going to be of great help to you.

5 Steps to Trading Forex

• Learn Forex Trading

A good place to start would be to understand how the Forex market works, why do currencies go up or down, how currencies are traded and what are the risks for a day trader.

Almost all financial market news websites have dedicated resources for keeping track of news related to the forex market and how it might affect the price in the market.

As a new trader you need to get a grip of the market and learn the tricks of the trade. Collect as much information as possible and try understanding the market by yourself. This was you can form your own understanding and develop a strategy. 

• Find a Regulated Broker

There are dedicated brokers for Forex who have designed a trading platform for traders to trade on forex market & CFDs only. All you need to do is to find a good broker and register yourself.

But the problem that exists with brokers is that there are regulated brokers and there are unregulated brokers. As a trader you should only seek to trade with regulated brokers.

The reason why you must trade only with regulated brokers is because there needs to be some protection against bad practised, which can be possible only through local regulators in your country that regulate and governs the market participants.

So tomorrow if you have a problem with your broker, you can go to the local authority and file a complaint. If you trade with an unregulated broker then if there is a dispute tomorrow, your local authority cannot help you as they won’t have jurisdiction over the unregulated broker.

It’s due to unregulated brokers that millions of people lose their money and have no way of recovering it. So, visit your local authority who deals with financial services or visit their website. Most regulators would have mentioned who are licensed to provide survives in your country. 

But unlike EU & African countries like South Africa & Kenya, Nigeria doesn’t have any regulation for Forex Trading. It is not illegal, but the market is still not regulated by the SEC.

Nigeria is the second biggest forex trading market in Africa, so, many foreign brokers have setup their local offices in Lagos, Nigeria. The two leading FSCA regulated South African forex brokers Hotforex, ForexTime are the largest CFD brokers in Nigeria in terms of monthly trading volume & number of active traders.

Many other foreign CFD brokers are also expanding to Nigeria for growth, even though the market is unregulated.

All traders from Nigeria currently trade with foreign brokers who are regulated by FSCA, FCA, CySEC, ASIC etc. By trading with a Top-tier regulated broker, you reduce the risk & protect yourself from being party to a scam.

• Open Trading Account

Once you decide which broker you want to register yourself with, then you are required to submit all your KYC documents to the broker for verification, generally the ID proof & the Address proof.

This step is crucial so traders should ensure that all your documents are authentic. If the broker feels your documents are not authentic then they can reject your application and not let you open your account. Even worse, you could face issues during withdrawal of your funds.

Make sure you provide the broker with all the correct information as much as possible so you don’t have any issues in the future. Once you have submitted your documents, the brokers normally take up to 2 days to process the documents, after which you will be sent your account details which you can use to fund your account & start trading.

The most general documents needed are residence proof, national identity proof, bank statement etc.

• Download the Platform

Brokers have specifically designed software for web trading as well as mobile trading. Depending on what is comfortable for you, choose and download the platform.

Once you have downloaded the platform then you can log in and understand the interface of the platform and how it works. One of the best ways to navigate through an app is to see all the webinars that guide you through a step-by-step process to start trading on the platform.

Before you can invest some money into the account, there are demo accounts that are given by the platform for users to trade with virtual money. The whole idea behind demo accounts is to help traders trade with virtual currency in a live market. This enables traders to understand how to trade on a live market and see first-hand how the market fluctuates. 

There are also features as a stop loss protection that you can use in a trading platform to protect against more than desired losses. By practicing trading on a demo account for few months & being profitable, you will understand the market and know how to trade in real market with actual money.

• Monitor your Trades & Keep improving

Once you have deposited money and are ready to begin trading then start small and always trade with a stop loss protection. Since Forex trades are mostly short term and don’t extend for days, as a trader you need to watch the market constantly & watch for news that could cause major market fluctuations.

A good trader doesn’t trade for more than a couple of hours in a day. It’s good if you keep yourself up to date with the news but don’t make it a habit which can lead to over trading.

Keep a target in mind and approach is slowly, due to the highly volatile market, you can easily lose your money so be extremely careful while trading in a volatile market.

A good routine will help you stay in check as well as control your losses and achieve targets.

• Caution for Forex Traders

Since forex is offered as a CFD instruments by brokers with leverage, you can end up going bankrupt in a few minutes.

Its due to the large number of losses for retail traders in the past due to high leverage, that regulators have put restrictions on brokers in terms of leverage ratio they can offer. Despite reducing leverage, it is highly possible for you to lose more than your investment.

This is the reason why Professional traders & major investors say that you should not trade in the Forex market or any other leveraged instrument if you don’t understand the risks.

According to well-known industry metrics, less than 25% of the retail traders make profit in the market whereas rest of them lose their money. So don’t be confident that you can definitely make money. This might not work for you the way it worked out for others.

There is a thin line between gambling and CFD trading, so it can get highly addictive and you can lose everything. So be smart and study the market first before traders. Talk to other experienced traders, learn from their experiences, and then decide whether you should trade or not. 

Always remember, never invest or trade with money that you cannot afford to lose.

*This is a featured post.