Forex trading instruments in Nigeria: which ones are right for you?

Forex trading instruments refer to the various types of tradable markets. They can be traded either in their own right or as a security made up of other trading instruments. These financial markets are built on the spot market, which is the price of a currency in real time. The forex market is open 24 hours, 5 days a week, including weekends.

There are four types of financial markets, viz. the spot market, the futures market, the options market, and foreign exchange options—traders can choose any of these markets depending on their preferences and needs and utilize them while investing in the forex market.

A forex trader must possess sound know-how of trading instruments before entering the forex market in Nigeria. The essence of forex trading instruments is that each of them is unique. To put it simply, some currencies have a different interest rate while others do not have such. With this in mind, traders should specifically consider different options to handpick the right instrument based on their personal preferences and needs. 

The forex trading instruments in Nigeria refer to liquid and varied markets for traders, who can enter wide-ranging properties with specific price movements and assume various positions before the rest of the market. 

It helps traders work in wide-ranging international borders from their home base, facilitating them to explore foreign exchange markets without traveling overseas.

Major Forex Trading Instruments

When people think of forex trading, they often just think of currencies. Though this is arguably the most crucial instrument in forex, there are other types of instruments that you can trade with (and make a lot of money). Forex traders will be familiar with currency pairs, futures, and other forex options.

In this section, we discuss the three options above and learn about their importance.

Currency pairs

The most basic forex instrument is known as a currency pair. Currency pairs are two different currencies that are related to each other. The most common currency pairs are the EUR/USD, GBP/USD, and AUD/USD, but thousands of currency pairs are out there (and more are added all the time).

Major currency pairs

Major currency pairs are the most popular and heavily traded currency pairs globally. They are:

1. EUR/USD (Euro and US Dollar)

2. GBP/USD (British Pound and US Dollar)

3. AUD/USD (Australian Dollar and US Dollar)

4. NZD/USD (New Zealand Dollar and US dollar)

These four currency pairs trade with each other more than any other pair. Which one is most important? It really depends on the time frame you’re trading on. For example, if you are trading a 1-hour chart, the EUR/USD will be more significant than NZD/USD.

Minor currency pairs

Minor currency pairs are usually not traded as heavily as the majors and tend to be more volatile. They aren’t as popular and won’t be as highly traded or heavily followed. However, that’s not to say that you can’t make money from trading them.

Minor currency pairs are:

1. AUD/CAD (Australian Dollar and Canadian Dollar)

2. GBP/JPY (British Pound and Japanese Yen)

3. EUR/CHF(Euro and Swiss Franc)

The minor currency pairs can vary depending on what’s happening in the world, but these are the most common ones you’ll find. These pairings can trade with each other more than any other pair.

Exotic currency pairs

Exotic currency pairs are formed when a pair like AUD/USD and GBP/USD trade with each other. Exotic pairs usually include the majors and minors but also other currencies (like EUR/USD and USD/JPY). Exotic pairs are more volatile than the majors, so you might have to trade them at a higher time frame to make money.

There are several currency pairs in the forex market. Although the pairs will likely confuse traders about what to choose and what to weed out, luckily, forex brokers and trading platforms list them all for you to choose from based on your preferences.

Forex futures

Futures are another type of currency pair that is used for a trading time in the future. A forex future is used to correct a currency pair price, assuming prices will change. For example, you could take a long (buy) position in the AUD/USD, knowing it will go up, and then fix that position later for a bigger profit.

Forex options are fairly similar to futures, but for one big difference – you can buy or sell them depending on your view of the market.

1. How do forex futures work?

Futures work when you tie into a currency pair at a specific rate at a particular point of time in the offing.

For example, suppose you are an investor in Nigeria and assume that the AUD will move upward against the Naira. You could use a futures agreement to lock in that currency rate to ascertain that your gains are secure (or losses are cut down).

2. Benefits of trading forex futures

A. No leverage

Forex futures does not entail traders trading with leverage – unless you want to, in any case. It is considered a benefit, as you will have a negligible risk of losing money. In case you do lose money, the loss level will be lower than your expectations in general.

B. Low transaction costs

Forex futures generally have a low/negligible transaction cost per contract (depending on the broker), so it won’t break your bank even if you’re trading for just $10,000. Most brokers will charge between 0.5 and 1%, but this is still much lower than forex margin trading, for example.

Forex options

Forex options are financial derivatives that allow traders to speculate on a currency price movement in the foreign exchange market. Created by futures and options exchanges, they have become a staple tool in forex trading.

1. How do forex options work?

Forex options allow traders to buy or sell a currency at certain price points in the future. Also, these options enable them to set premium levels and expiration dates. 

Thankfully, forex options can be traded in multiple ways other than setting expiration dates and purchasing or selling a single currency. Also, it is worth noting that some of these options can be set for any duration of time, right up until the expiration date.

2. Benefits of trading forex options

A) Leverage – you can invest the least amount of funds you have to invest in to buy shares squarely—this process is called trading on margin. One thing to keep in mind is that your exposure remains within your trading budget.

B) Directional Risk – Depending on your prediction of whether the value of a specific currency will appreciate or depreciate in the short to medium term, you can consider choosing options on the direction of movement; to bet that it will rise or to bet that it will fall. Ultimately, this will be profitable if you pick the right direction and things go your way.

C) Time Value – Options are priced based on how much time they have left until expiration (a good thing!).

Other Forex Trading Instruments

Contracts for Difference (CFDs)

A CFD is a contract between two parties, where one party agrees to pay the other party the difference between an underlying asset’s opening and closing prices. CFDs are available for thousands of assets, including stock indices, shares, commodities, exchange rates, and bonds.

How do CFDs work?

The client places an order to do trading of an asset. If the trading brings out profits, the broker provides the same to the client. On the other hand, if the trade is full of loss, the same is covered by the broker. In this way, you can start speculating on the price variations without owning the asset.

Benefits of trading CFDs

1) Low Entry Cost – you can start trading with as little as $500, making it much easier for an individual to enter the market.

2) High Leverage – you can use a shallow margin to trade a high volume of currency pairs. It allows you to earn more money with less capital because you are only betting on the position, not the entire value of the underlying asset. 

3) Day Trading – many brokers allow you to trade currency pairs 24 hours per day in real-time, enabling you to close your position at any time during the day if you are betting that the price will bounce back again.

Exchange-Traded Funds (ETFs)

ETFs are a good option if the security of your investment without any other hassles is a particular point of consideration for you. By choosing ETFs, traders can buy various tradable assets, for example, stocks, bonds, etc., without hassle. So if gaining profits is in your mind, investing in ETFs is a worthy option. After all, through ETFs, you can easily manage your investments on your own rather than having to choose and install someone else for the same.

How do ETFs work?

ETF stands for exchange-traded funds, which are products that track indexes. They are designed to give investors exposure to the performance of a particular stock market or asset class. It is achieved by owning a few varied stocks in the fund and holding them on an exchange. The shares in this fund can be bought and sold daily like any other share, which has made ETFs extremely popular among professional traders because they offer liquidity. 

Benefits of trading ETFs

A. You have the opportunity to broaden your investments.

B. You can maximize market swings (since they all impinge on various ratios in multiple ways).

C. You can invest the least funds you have at one time.

D. You can gain a better understanding of the stock market.

Factors to Consider When Choosing Forex Trading Instruments

To ensure good success in forex trading, traders must always make very good or favorable decisions. Meanwhile, they must choose the right forex partner is must to deliver the best trading results. Here are the factors worth considering:

1. Trading goals

Start by nailing down your trading goals. What is your ambition in trading? Do you have a specific time frame in mind? Alternatively, do you intend to continue trading as usual back to back with the basic goal of making money immediately? What prompts you to use the instrument in the first place? Which instrument fits your trading strategy and your short-term or long-term goals to a nicety?

2. Risk appetite

Conceive how you consider and confront a trading risk. Do you tend to trade with high risk and high reward, or do you simply want to get involved in multiple trades to maximize your profits? Knowing how you can tackle risk will help you decide what instrument will suit your needs.

3. Trading experience

Trading experience matters a lot. For example, if you carry good trading experience, you can maximize forex trading.  Alternatively, if you do not have much experience, then choosing one of the most reliable Nigerian forex brokers is good. Also, start considering reading as many trading articles as possible before you take the step to begin trading real-time instruments.

4. Market volatility

It’s important to consider the volatility in the instrument’s market. High volatility is usually more difficult to manage. You will also likely have problems when trading real-time instruments since the market moves so quickly.

Conclusion

As one of the novice Nigerian traders, now you would have gained insight into the various types of trading instruments out there well. These trading instruments are generally divided into four categories: spot foreign exchange, futures contracts, option contracts, and derivatives. Each category has also been briefed and would have helped you understand which instrument fits your needs best.

However, choosing the right forex trading instruments is important based on individual needs and goals. The rate of increase in the market and the tax rates applied by different countries can vary. For example, currencies with an average return of nearly 100% may not be suitable for individuals who want to save money or contribute toward retirement. Financial advisors can help traders identify which currencies best suit their needs and evaluate the most appropriate strategy. This will allow them to trade more precisely and potentially avoid losses due to poor decisions about their expenses or savings goals.