Recently, Nigeria has seen spectacular growth in its online trading community. The country is attractive to international brokerages thanks to its favorable legislation. Forex is being promoted as a convenient way to earn from the comfort of one’s home. Through advanced platforms and apps, local traders buy and sell currencies, stocks, and assorted derivatives. The currency exchange allows anyone to monetize financial knowledge.
Now, due to COVID-19, unemployment has shot up. For some Nigerians, Internet-based trading is the only source of finance. Before opening a live account, clients are advised to practice in the simulated mode. Forex demo account is easy to register, and they provide excellent training opportunities. Analysis of risks is an essential part of trading education. So, what threats should you be aware of?
Uncontrollable Financial Markets
A trader can manage their risk, but market dynamics are beyond their control. Force majeure events and global crises may cause a dent in profits. For instance, the outbreak of COVID-19 has shattered many economic systems and caused wild volatility on the stock exchange. The scope of the pandemic could not be foreseen – today, over 200 countries are directly affected. There, economic development has been put on hold. Governments are focused on bailouts and recovery plans.
Another example is the oil price collapse preceding the outbreak. In March 2020, Russia and Saudi Arabia failed to reach an agreement concerning production cuts. The OPEC+ deal failed, and currencies of oil-exporting nations (e.g., the Russian Rouble) tumbled down. Other common drivers of market swings include:
- decisions by central banks regarding fiscal policy and interest rates;
- new laws, regulations, and taxes;
- official statements that concern economy and finance;
- federal elections;
- geopolitical tensions;
- terrorist attacks;
- natural disasters.
Risks of Leverage
Trading on margin is an important feature of an FXTM live account that boosts purchasing power. Even with a modest investment, you may trade sizable volumes. The scheme is used for currency pairs, stocks, and derivatives. However, while the brokerage increases your buying capacity, risks also rise.
Consider the standard ratio of 1:100. The arrangement allows you to trade $10,000 with just $100 of your own. If you make $100 in profit, this means the return rate is 100%. On the other hand, $100 lost on the trade will leave you with zero balance.
Both upward and downward movements can prove profitable. However, it is important to remember that leverage is a double-edged tool. A client may gain or lose more than they would otherwise. Thus, while it is tempting to use leverage, risk management is mandatory.
Different currency pairs have different liquidity. The measure reflects how easy it is for buyers and sellers to connect. Trades for less liquid instruments take longer. Liquidity describes separate assets and the marketplace on the whole. When it rises, so may your trading costs.
These effects are observed during weekends and bank holidays. Exotic currency pairs are generally less liquid than Majors and Minors. This is due to their connection to emerging economies.
Wrong Choice of Broker
Choosing a brokerage is a crucial step. Not only do these companies register accounts. They also work as intermediaries connecting you to the global financial markets. All deposits and withdrawals are processed by the broker. This means it must be reliable.
In Nigeria, state regulation is still in its formative stages. The number of fraudulent sites is growing, and making a choice is challenging. Do not trust the hype. Look for licensed and well-established brands that have been in business for years. These companies serve millions of traders across the world.
What to Do
Although you may not predict system disruptions, personal risks are manageable. First, top platforms from FXTM have features that limit potential loss for each trade – Stop Loss and Take Profit. Secondly, risks spread over different assets are lower. Portfolio diversification is essential.
Asset allocation may follow different principles. For example, a rule of thumb for stock traders is to calculate the proportion of shares as 100 less their age. This means that a 40-year-old trader should have 60% of stocks in their selection. When several instruments are traded, the underperformance of one asset may be covered by profits elsewhere.