Why forex trading is risky for Nigerian retail investors
Many Nigerians are familiar with the spot forex market, where forex transactions are carried out on the spot as seen with bureau de change, but the retail online forex market is where currencies are traded online for the purpose of speculation.
The online nature of the market, traded via unregulated brokers, brings with it some peculiar risks. Anything done online is prone to scams, cyber-attacks, and the advent of social media, makes it easy for scammers to reach a greater audience.
The do it yourself approach of retail trading also means less advise/input from your broker, and without relevant knowledge, you risk taking misinformed decisions on trades.
Retail Forex traders’ aim is to make profit on the pair of currencies; however, you should keep in mind that it also involves significant risks for the reasons discussed below.
A Lack of Forex Trading Regulation in Nigeria
A major risk involved in forex trading in Nigeria, is the lack of an official regulatory body overseeing the activities of the trade. Although forex trading is not prohibited in Nigeria, theabsence of government oversight has led to fraudsters taking advantage.
For instance, in 2021, Nigerian forex traders lost N213 billion to MBA Trading & Capital Investment Ltd. The EFCC declared its then CEO wanted for allegedly mismanaging customer funds, and falsely claiming to be regulated by the Securities & Exchange Commission (SEC) in Nigeria.
MBA Trading was alleged to be a Ponzi scheme which paid older members, with funds received from the newer ones. SEC also had to come out and clarify its position, by issuing an Offici
Dealing with a broker that is not a SEC trading license holder, means there is no Nigerian government cover for you. You therefore don’t get to benefit from the Investor Protection Fund, which exists to compensate investors who suffer monetary loss due to bankruptcy, negligence, or defalcation, by an authorized trading license holder.
It is important to note that in 2018, SEC had also issued A Public Notice on Retail Online Forex Trading in Nigeria
The notice read: ‘The public is hereby advised that online retail forex trading is currently unregulated and consequently may be subject to abuse.’
‘Until a framework for regulation of online retail forex trading is developed by the SEC, any person participating or engaged in such investment activity does so at his or her own risk.’
To avoid falling for scams, Nigerian traders can register with international online forex brokers that are regulated outsidewith Top-tier regulatory bodies. For example, within Africa,retail forex trading is regulated in South Africa by the Financial Sector Conduct Autho
An FSCA license in addition to another license such as one from the Financial Conduct Authority (FCA) of the United Kingdom, normally makes a broker safe, as its activities are being monitored by multiple regulators.
But Karan Singh from broker comparison portalSafeForexBrokers.com
Note that when trading with foreign brokers, you may fall victim to a fraudulent one, just like in the case of a local one. Secondly, even if you are dealing with internationally regulated brokers, you may not enjoy the same strong protection compared to traders in those foreign countries.
Brokers Allow You Leverage/Borrow More Than You Can Manage
Leverage is a loan provided by your broker, so as to help you get higher exposure in your trading position than the amount you have.
As a result of a lack of regulation, brokers in Nigeria may offer you high leverage for their own selfish interests, and this may ruin your entire trade, and put you into enormous debts.
To get access to leveraged trading from your broker, you would be required to deposit a percentage of an amount known as “margin,” which is used to open and control leverage.
Leverage is expressed in a ratio like 200:1, which means that you are using $1 to control currency worth $200. That is, you can control $10,000 position, with just a $50 deposit (margin).
Although leverage offers benefits, it is still a double-edged sword, meaning that it can also significantly magnify your losses due to the high degree of market volatility.
Therefore, take note that just a little currency move could result in huge losses when using leverage. Foreign brokers operating in Nigeria allow you a leverage as high as 1:1000but they will not stand by and watch you blow their money.
Read also:How does forex trading actually work?
The trader using a higher leverage ratio stands a higher chance of getting kicked out of the market by the broker, than one using a lower leverage, should the market move against them in the same proportion.
Each time you get kicked out of the market, you pay new commissions/fees to reenter and your broker ultimately benefits.
Exchange Rate Movements Are Unpredictable
A major factor that causes sudden exchange rate movement is the economic policy of a country, especially when central banks adjust interest rates.
For example, the currency note redesign policy initiated by the Central Bank of Nigeria (CBN), has led to a scarcity of cash, which has caused the external reserves to drop & Naira to fall against the dollar.
Economic data released frequently and major news events,also cause sudden movements of the exchange rate.
For instance, the National Bureau of Statistics (NBS) of Nigeria usually releases data on unemployment, inflation,economic development, etc.; and this affects the value of the naira against other currencies.
Major crises like the ongoing Ukraine war also affect the exchange rate. There is this belief that the war in Ukraine would have little effect on the European economy, so the US dollar being the safe haven currency, continues to appreciate against other currencies, as investors invest in dollar backed assets.
Sometimes the anticipation of an economic report is enough to stoke fear in the market, and move exchange rates even before the report is released. Also, a simple comment from a central bank governor is also capable of moving exchange rates suddenly.
Stop Loss Orders Only Offer Limited Protection
A stop-loss order is one you set in advance to automatically exit your open position, at a predetermined price with the purpose of minimizing losses. Whenever you set a stop loss, you have accepted to absorb a certain amount of loss.
One major factor that can affect you while using stop-loss isgapping. It refers to instantaneous movements in price during periods of high volatility,
When the price gaps past your stop loss, your position will be closed at the next available price, even if the price is greatly higher or lower than the stop price.
For example, you buy EUR/USD at 1.2110 and set a stop loss at 1.2100. The exchange rate could suddenly gap from 1.2110 to 1.2097 without passing through your stop price of 1.2100.You end up exiting the market at an inferior price of 1.2097,thus losing 3 pips more than you intended.
Copy Trading Can Also Result in Losses
Copy trading is a strategy where you copy the trades of other experienced master traders. It has some merits (on paper), especially if you are a beginner, as it saves time, and removes emotions from trading. However, the demerits are:
▪ You need to have sufficient funds in your account. When you copy a master trader, you inherit his leverage ratio and stop loss. Insufficient funds will see you kicked out of the market sooner than you think.
▪ When copy trading you have an option called a ‘copy stop loss’ that enables you terminate the copy relationship or close some positions where you feel the master trader is underperforming. However,
▪ Past performance of the master trader you are copying is not a guarantee of future results.
An Unstable Network Connection
In a report by Speedtest Global Index in September 2022, Nigeria’s internet speed was rated among the slowest in the world. Nigeria was rated 151st among the 182 countries ranked globally.
The internet service provided by telecom firms in Nigeria usually experiences breakdowns, and this unfavorable development hampers and disrupts business activities, including forex trading.
For instance, on February 14, 2023, one of the telecom providers, MTN Nigeria, experienced a major collapse in its operations, which disrupted communications and internet operations among its millions of customers in the country. The situation was so bad that MTN had to offer a public apology.
An unstable connection means high latency, and can lead to avoidable re-quotes where you are told the price you intended executing at is no longer available. When trading, there is an urgent need for speed.
Forex Trading is very Risky
Forex Trading is a risky business for inexperienced traders, and there are many stories of traders losing their money. Therefore, it is imperative that you see if you can cope with the risks involved before venturing into it, and try to avoid it if possible.