Forex of foreign exchange trading is changing one currency to another to make profits from the forex market potentially. Different currencies are traded, including US dollars, Australian dollars, Canadian dollars, Japanese yen, British pounds, and Swiss francs. Forex trading is based on the exchange rate at which the currencies are bought and sold. These exchanges occur over the counter (OTC) and are not held on any physical exchange.
The global banking sector and other financial bodies monitor the forex market. Most trades occur between institutional traders like fund managers and people who work for banks and multinational corporations. To make forex trading profitable, traders must select the best forex instruments, such as currency pairs, futures contracts, options contracts, and exchange-traded funds (ETFs).
This article will examine the various types of forex instruments available in Nigeria, factors to consider while selecting forex instruments, and how to choose the best forex instruments for Nigerian traders.
Understanding of the Forex Instruments
Multiple instruments are available to Nigerian traders in the diverse world of forex and currency pairs. However, the leading forex instrument is the currencies of different countries. Currency rates or currency pairs show a particular currency’s relation to US dollars or other currencies formed by the market demand and supply and other fundamental factors. As a general thumb rule, currency pairs are the most liquid and easily convertible forex instruments in the forex trading market in Nigeria.
The exchange rate is expressed in the form of a currency pair that represents the value of a currency concerning the other stuff. For instance, the currency pair EUR/USD is the exchange rate, where EUR is the base currency, and USD is the quote currency. This exchange rate represents the quoted currency required to purchase one unit of the base currency.
Futures contracts are another forex instrument, a forward transaction containing expected maturity dates and contract sizes. In futures trading, currencies are exchanged at a specified date but at a future rate. Futures contracts are traded on forex markets and settled down daily on a market-to-market basis.
Options contracts are derivatives – financial instruments with fluctuating values based on different variables – wherein the owner grants the holder the right to buy a particular forex market instrument – a particular currency – at a specified rate within a specified period. The options contracts give obligation to one party and right to another.
Lastly, exchange-traded funds or ETFs are open-ended investment firms that can be traded throughout the day at any time. The ETFs gain strength as the USD weekends against another currency and hence, replicate currency market investments.
Factors to Consider When Selecting Forex Instruments
There are several forex instruments to consider, and the forex market is the largest and most liquid of all. This can make selecting the best forex broker in Nigeria a problematic task. To help novice traders, here are some factors to consider –
- Regulatory compliance – The first thing that must be kept in mind while choosing forex instruments is to choose a reliable and regulated forex broker in Nigeria that strictly adheres to the laws and regulations. Partnering with brokerage platforms regulated by leading monitoring authorities like CBN is essential.
- Liquidity – The forex market is the most liquid financial market, which refers to how active the market is. One of the reasons why forex is highly liquid is because the market is open 24 hours during weekdays and involves large volumes of trades daily.
- Volatility – Another major factor that Nigerian traders must consider is the volatile nature of the forex market. This has a significant impact on currency prices. High liquidity generally results in increased volatility, causing prices to move drastically.
- Trading hours – The forex market seldom stops. The significant needs in Sydney, Tokyo, New York, and London are in different time zones, making the market international and open 24 hours.
- Risk management – Since the forex market is highly volatile, trading foreign currencies involves different types of risks, such as leverage, market, transaction, and currency risks. This requires Nigerian traders to make well-designed trade plans to deal with all sorts of uncertainties and divert the problems leading to loss-making trades.
- Historical performance – There are thousands of forex brokers available in Nigeria, making choosing the best forex broker problematic. Consider the forex broker in Nigeria that offers top-notch security measures and has an excellent historical record of providing financial services to all traders.
- Personal trading goals and preferences – Nigerian traders make a critical mistake while selecting forex instruments to start trading without a proper trading plan with the purposes and priorities mentioned. The primary goal of any forex trader is to earn profit by buying low and selling high. It also requires them to observe the market and follow essential news, especially for short-term traders.
Selecting the Best Forex Instruments for Nigerian Traders
- Best currency pairs for Nigerian traders – Currently, there are four most important currency pairs for Nigerian traders: EUR/USD, USD/JPY, GBP/USD, and USD/CHF.
- Best futures contracts for Nigerian traders – Nigerian Exchange Ltd received the SEC (Securities and Exchange Commission) approval for the best futures contracts for Nigerian traders, including Access Bank PLC Stock Futures and Zenith Bank PLC Stock Futures.
- Best options contracts for Nigerian traders – Avatrade and Pepperstone
- Best ETFs for Nigerian traders – Global X MSCI Nigeria ETF
Forex trading in Nigeria is becoming increasingly popular with continued growth in technological innovation, mobile usage, and accessibility. Although the future of forex trading is not guaranteed, the western world has become more aware of the growth and interest shown by Nigerian traders. Connecting the economy to the world will undoubtedly bring more opportunities for traders and allow them to move to the global economy. With the right skill and knowledge, traders can improve their financial valuation and create stable income from trading foreign currencies.