How much Money do You Need to Trade Forex in Nigeria?

What are the trading costs of trading forex in Nigeria?

Broker Service Levels

👉 No two brokers are the same and therefore Nigerian traders must consider several factors when they weigh the most advantageous choice in broker for their account. Not all brokers can make a market equally and the reason for this is simple.

👉 Banks are the primary market makers, which means that they create a market where currencies can be bought and sold. These banks are in close partnership with other banks along with several price aggregators, who are the brokers.

👉 These relationships are determined by the capitalization and overall creditworthiness of each brokerage firm. In the forex market, there are no guarantors or exchanges because the market is decentralized, and this means that there is only a credit agreement between participants.

👉 Where an online market maker is concerned, for instance, the effectiveness of a broker will be determined by their relationship with banks, and the overall volume that the broker trades with them.

👉 Subsequently, brokers who have higher trading volumes will be first in line for tighter spread quotes from these liquidity providers.

👉 The brokerage business may pass on the average bid and ask prices to its retail consumers if its market maker has a good connection with several banks and can aggregate, for example, 12 banks’ price quotations.

👉 The dealer can then pass on a more competitive spread to you than less well-capitalized rivals, even after widening the spread to account for profit. This may be something to check for if you are working with a broker that can provide assured liquidity at competitive spreads.

👉 However, you may choose to pay a set pip spread if you know that you will always obtain at-the-money executions. Because slippage happens when your deal is performed outside of the price you were quoted, it is a cost to avoid.

👉 Whether you should pay a small charge to a commission broker depends on what else the broker is providing. You could get something extra, such as access to a proprietary software platform that is better than most online brokers’ platforms, in return for a little fee.

Minimum Deposit

👉 Forex brokers do not all charge the same minimum deposit, and therefore some are more popular than others. Typically, brokers who have larger minimum deposit requirements tend to have lower leverage ratios because traders must have more capital to allow them to start trading.

👉 The opposite is true of brokers who have low capital requirements as they allow traders to use higher leverage ratios, allowing them to open larger positions and giving them smaller margin requirements.

👉 There are a few forex brokers who allow traders to start trading without making a minimum deposit. These brokers offer what is known as either a “No-Deposit Bonus” or a “Welcome” and “Sign-Up” bonus.

👉 With these bonuses, traders register a live trading account, complete the account verification, and are given a certain amount of trading credit. This trading credit can be used in the same way as a minimum deposit, and traders can carry out trading activities without committing capital first.

👉 However, because these funds are not real, they cannot be withdrawn from the account, and traders must trade using the credit and make a profit to be able to withdraw funds from the account.

The Spread

👉 The spread is the most well-known charge associated with trading foreign exchange. A Forex trader must be aware of additional charges that may or may not be obvious.

👉 Most traders who have a basic understanding of forex trading know that the spread is the difference between the ask and bid prices for a currency pair. You can see this in action with the USD/NGN (US Dollar/Nigerian Naira) pair, which is trading at 414.850/415.580 at the current exchange rate at the time of writing.

👉 This implies that the buy and sell prices are 414.850 and 415.580, respectively, which signifies the price at which your broker will buy from you.

👉 Most brokers will always offer tighter spreads on forex major pairs because they have high liquidity and higher trading volumes, these currency pairs include EUR/USD, GBP/USD, and several others.

👉 Minor forex pairs are those that do not contain the US dollar as either the base or the quote currency. There are also exotic currencies such as the Turkish Lira, Mexican peso, and the Nigerian Naira that are traded less frequently, if at all, and thus have higher spreads because of their low liquidity.

👉 The actual spread that Nigerians can expect will depend on the size of their position, whether their broker charges floating or fixed spreads and the overall market conditions on the day that they trade. Most brokers also charge different spreads according to the account type the traders use.

Commissions

👉 Other trading charges, such as commissions and fees, may also be imposed by your broker. Due to the intense competition among brokerages, most brokers have stopped collecting trading charges, although you may still come across a few who do.

👉 Typically, trading fees are based on the amount of money that is exchanged on either side of the deal. There are two types of currency pairs namely those that can be bought and those that can be sold. “Per traded side” refers to the kind of currency pair you are trading.

👉 According to your total trading volume, “per traded lot” is a fee that is levied for each traded lot (100,000 units of the base currency.) Brokers who promote zero-spread trading accounts sometimes provide trading fees based on the number of traded lots.

👉 Even though you will not be charged any spreads, the trading commissions you will have to pay more than make up for the savings in spreads.

Inactivity Fees

👉 Many brokers still charge their customers an “inactivity fee.” This means that your broker may charge you an inactivity fee if you do not meet a minimum trading volume, such as 10 deals in three months. For stockbrokers, inactivity fees are more frequent than for CFD and Forex brokers.

👉 Checking your broker’s website under the “Trading Costs,” “Product Specification” section or contacting the broker directly through email or live chat is the safest approach to find out whether your broker is charging any trading commissions or fees.

Slippage

👉 Slippage is distinct from spreads, commissions, or fees in that it is not a fixed cost. You do not benefit from slippage if your broker (if it is honest and/or well-regulated) is honest and/or well-regulated.

👉 The term “slippage” has been thrown about a lot recently. Simplified, slippage is a price disparity between what you saw on the screen before making a transaction and the price at which the deal was performed.

👉 This is because all you are doing with your broker when you click the ‘trade’ button is placing an at-market order. However, your broker may not always be able to get you exactly what you thought you were trading at.

👉 If you wanted to purchase USD/NGN at 414.85015 but the order was filled at 414.85000, it is a 1.5-pip difference. This is not the spread, but the difference between the projected bid or ask price and the actual bid or ask price at which the order was completed.

👉 There is often a price mismatch between buyers and sellers that is the most typical source of slippage. A currency pair’s current exchange rate indicates the most recent exchange rate at which a transaction happened, for instance, a buyer and seller agreed to exchange currencies at a specified rate.

👉 Nigerian traders must remember that the Forex market is the world’s most liquid financial market, buyers and sellers may be found at any price level.

👉 However, unanticipated market situations, such as the publication of unexpected market reports, political and social unrest, and unexpected natural disasters, may cause this equilibrium to be thrown off course.

👉 Even the time of day when you wish to trade might influence whether slippage occurs. Afternoon trading is at its busiest between London and New York City. During this time, the London Market and the New York market are both open and this happens around 4 pm GMT.

👉 Slippage is normally negligible at this time of day, particularly in the event of unexpected market news. Avoid trading during periods of low liquidity to avoid slippage and maximize your profit potential.

Overnight Rollover Costs

👉 Rollover costs are another form of expense that is widespread in the foreign exchange market. These costs become more significant the longer you hold your transactions for than a single day.

👉 This is because the rates that are given for an FX pair are usually for the pair’s spot market, which is typically for settlement on a T+2 basis.

👉 The reason you get charged this is because of this. If you keep the transaction open overnight to bring this forward by one day, then the settlement date will also be brought forward by one day because of your action.

👉 Since you altered the foundation of the deal, you will be charged a fee to consider this development. The fees for rolling over your position are determined by the currency pair that you are trading.

👉 Nigerian traders may be undoubtedly aware of this fact, but central banks across the globe levy interest rates on customers who keep their national currencies.

👉 The only exception where overnight fees are concerned involves Muslim traders who follow Sharia law. To accommodate all traders, many forex brokers offer an Islamic or Swap-Free account option, allowing Muslims to convert their accounts into a Sharia-compliant option.

👉 When Muslim traders use these accounts, they are not subject to any interest, which is typically considered exploitive or wasteful by Sharia.

👉 However, while some brokers do not apply any additional fees such as commissions or wider spreads to offset the absence of overnight charges, others will apply wider spreads or an additional admin fee when traders keep their position open for longer than a certain period.

👉 Because such commissions or wider spreads are not considered interest, they are legal and can therefore push up the trading costs of Muslim traders in Nigeria.

Financing Costs

👉 Financing expenses are often included in the rollover fee, and they are an essential cost to consider while trading on the Forex market. Due to the tremendous liquidity of the Forex market, currency pairings tend to move in tight ranges.

👉 Subsequently, Forex brokers provide traders with remarkably high leverage, allowing them to benefit from even little price swings. While most stockbrokers provide 1:5 leverage, Forex brokers often provide leverage of up to 1:500.

👉 Therefore, Nigerian traders can handle a position that is 500 times greater than their trading account.

👉 It does, however, come at a price and financing expenses are represented in yearly interest rates, which are taken from the current market interest rate plus a modest markup charged by brokers.

👉 Financing expenses are applied to the notional position daily. While these expenses are often little, they may quickly add up as your overall position size grows.

Deposit and Withdrawal Fees

👉 Deposit and Withdrawal fees are common fees that are charged by many brokers in the industry. When Nigerians make deposits to their account or withdraw funds from the account, they could face a deposit or withdrawal fee, which is often a certain percentage of the total amount deposited or withdrawn.

Currency Conversion Fees

👉 Brokers will offer Nigerian traders a choice between a few currencies as the default currency of the trading account. When Nigerians trade financial instruments in other currencies or deposit/withdraw in another currency other than the base currency of the account, they could face a certain percentage conversion fee.

Trading and Non-Trading Cost Summary (Example)

👉 It is simple to compute your overall cost per transaction now that you know the primary charges of Forex trading. Here is an illustration. Brokers do not offer USD/NGN because of its low liquidity and thus, we will use AUG/USD as an example to indicate some overall costs.

👉 Assume you purchased the AUD/USD pair with a 1 lot position size (100,000 units of the base currency, in this case, AUD). These are your trade’s average expenses:

➡️ Spread – if AUD/USD trades at 0.7050/0.7052, the spread is 2 pips. If you purchased a single standard lot of AUD/USD, 2 pips translate to a $20 fee.

➡️ Commission fees – there are only a few brokers that will charge a spread and commission fees, with most brokers charging either the spread or commissions. For instance, if your broker charges you $7 per round turn, this means you are paying one fee for opening and closing a trade. If you purchased a single lot in AUD/USD, you would only pay this $7 for your trade. However, it will depend on your broker’s unique fee structure.

➡️ Slippage – if you employ news trading strategies and you purchase AUD/USD after a major news release, slippage could be a large threat to your capital. When there are prevailing high volatility market reports, slippage can increase by dozens of pips, which could lead to great losses.

➡️ Overnight Fees – These fees will depend on the interest rates of AUD/USD, with AUD (for example) known to have a higher interest rate than the United States dollar. Thus, the broker could add the difference between these rates to the trading account for every day that you hold your AUD/USD pair open.

➡️ Financing Fees – If you have a leveraged trade open, your broker will apply a financing fee. If your trading account balance is $10,000 but your overall position size is worth $100,000 it means that you need at least 1:10 leverage. However, most brokers offer more than this, from at least 1:33 or higher, which means your margin requirement is $3,000. In addition, this also means that you will need to borrow the remaining $97,000 from your broker to execute the trade, subjecting you to a financing cost.

➡️ Withdrawal fees – If you close your position on AUD/USD and you have made a profit, you can decide to reinvest the profits or you can withdraw it from the account. If your broker applies fees for withdrawals, you could face additional fees. This fee is flexible and can differ between brokers.