What is Forex Leverage in Nigeria?

How to mitigate the risks of leveraged forex trading in Nigeria

👉 To protect yourself from risks experienced when trading with leverage, you can do the following:

➡️ Ensure you have a thorough understanding of how a margin account operates and what happens if the price of the stocks that were bought on margin falls is essential.

➡️ Be aware that your broker will charge you interest on any money that you borrow from them and comprehend how this will impact the overall return on your assets.

➡️ Be aware that certain securities cannot be acquired using a margin account.

➡️ Having a conversation with your broker about whether you should trade on margin depends on several factors, including your financial resources, investing goals, and your level of comfort with risk.

👉 Alternatively, you can also use the following Risk Management Tips:

➡️ Make sure you know which risk you are exposed to

➡️ Educate yourself and never stop learning

➡️ Prepare for every scenario

➡️ Create a solid forex trading plan

➡️ Always keep a clear head about profit expectations

➡️ Limit the use of leverage

➡️ Never risk more than you can afford

➡️ Always use Stop-Loss and Take-Profit Levels

➡️ Do not trade on emotions or “gut” feelings

➡️ Make sure to use diversification

Make sure you know which risk you are exposed to

👉 The Forex market is one of the world’s largest financial marketplaces, with daily transactions exceeding 6 trillion USD.

👉 With so much money at stake, banks, financial institutions, and individual traders have the potential for both enormous gains and losses. While banks providing money to borrowers must exercise credit risk management, traders must do the same with their investments to secure a return.

👉 Forex trading risk is simply the possibility of incurring a loss when trading and the following types of risks can extend to other financial markets such as shares, commodities, metals, crypto, and others:

➡️ Market Risk

➡️ Leverage Risk

➡️ Interest Rate Risk

➡️ Liquidity Risk

➡️ Risk of Ruin

Market Risk

👉 Market risk is the possibility that the market may perform differently than anticipated. It is the most prevalent risk in trading. For instance, if you feel the US dollar will rise against the Euro and decide to purchase the EURUSD currency pair, only for it to decline, you will incur a loss.

Leverage Risk

👉 Numerous traders utilize leverage to open transactions that are far greater than the amount of their initial investment. In some instances, this might result in a greater loss than the original amount.

Interest Rate Risk

👉 The interest rate of an economy could influence the value of its currency, putting businesses (and traders) at risk of unforeseen changes in interest rates.

Liquidity Risk

👉 Some currencies and trade instruments have more liquidity than others. If a currency pair has high liquidity, there is a greater supply and demand for it.

👉 Thus, transactions can be executed much faster but for currencies with low demand, there may be a delay between the time you initiate or close a transaction on your trading platform and the time that trade is completed.

👉 Subsequently, this could imply that the deal is not performed at the anticipated price, resulting in a lower profit or a loss.

Risk of Ruin

👉 This is the risk that your trading money will run out. Imagine you have a long-term plan for how you believe the value of a security will change, but the security goes in the other way.

👉 You must have sufficient funds in your account to endure this move until the security moves in the desired direction.

👉 If you do not have enough capital, your transaction might be instantly closed, and you could lose all you have put in that trade, even if the security subsequently moves in the desired direction.

Educate yourself and never stop learning

👉 If you are new to trading, you should teach yourself as much as possible as soon as feasible. Regardless of how much experience you have with trading on the Forex market, there is always some fresh information that may be acquired.

👉 Continue to educate yourself on the Forex market by reading and researching relevant topics. The good news is that there is a broad variety of educational materials available online that might be of assistance, such as articles, videos, and webinars that cover all financial markets.

Prepare for every scenario

👉 There is no way to foresee the Forex market, but there is a lot of information from the past that shows how the market reacts in various scenarios. Even if the past does not repeat itself, what has occurred shows what can be done.

👉 Because of this, it is critical to examine the currency pair’s history before making a trade. Plan for protecting yourself in the event of a negative incident occurring again.

Create a solid forex trading plan

👉 Inexperienced Forex traders often make the mistake of opening an account and immediately placing a transaction based on their gut feeling or what they heard on the news that day. Even though a few good deals may result from this, they are just a matter of chance.

👉 Stick to your Forex trading plan once you have created it. Having a trading strategy in place will keep your emotions in check and prevents you from overtrading. Plan your entry and exit tactics to be obvious so you may grab your profits or reduce your losses without getting afraid or greedy with a strategy.

👉 Discipline in trading is key to effective risk management, and this strategy can help you get there.

Always keep a clear head about profit expectations

👉 The unrealistic expectations of novice Nigerian traders are one of the causes of their excessive risk-taking.

👉 Because of this, they may believe that aggressive trading will allow them to reap the benefits of their investment more rapidly. More experienced traders, on the other hand, consistently earn money.

👉 Therefore, the best method to begin trading is to set reasonable objectives and stick to a cautious strategy. Admitting your mistakes and being realistic go hand in hand.

👉 When you realize you have made a mistake in a transaction, you need to get out of the position as fast as possible. Forex trading is not a good place to try to transform a terrible situation into a good one, but this is a normal human response.

👉 Greed is a dangerous emotion that may lead to bad trading judgments if you do not keep it in check.

Limit the use of leverage

👉 Leverage allows you to amplify your trading account’s earnings, but it may also increase your losses, so raising your exposure to risk.

👉 With a higher leverage ratio, your exposure to Forex risk is thus increased. When it comes to forex risk management, it is prudent for beginners to restrict their exposure by avoiding large leverage.

👉 Consider using leverage only when you have a thorough grasp of the prospective losses. If you do so, you will prevent significant portfolio losses and prevent being on the wrong side of the market.

Never risk more than you can afford

👉 Never risking more than you could afford to lose is one of the most basic laws of risk management in Forex trading. Despite its basic nature, disregarding this rule is a typical error, particularly among those who are new to Forex trading.

👉 The foreign exchange market is inherently unpredictable, therefore traders who risk more than they can afford are extremely exposed. If a modest string of losses might wipe out most of your trading money, it shows that each deal involves excessive risk.

👉 Covering lost Forex money is challenging, as you must recover a higher proportion of your trading account to make up for your losses. Before engaging in Forex trading, you should thus consider the risk involved.

👉  Stop trading if the likelihood of profit is low in contrast to the potential reward. Using a Forex trading calculator might help you limit your risk.

👉 A tried-and-true guideline is to never trade with more than 2% of your account balance at any one time. Furthermore, many traders change the size of their positions to match the volatility of the pair they are trading. A pair with a more volatile currency requires a smaller stake than one with a less volatile currency.

👉 At some time, you may incur a significant loss or exhaust a significant percentage of your trading money. After a substantial loss, you might want to attempt to recoup your investment with the following deal.

👉 However, the worst moment to increase your risk is when your account balance is already low.

👉 Consider lowering your trading size or taking a break until you can locate a high-probability transaction during a losing run. In addition, you must always maintain emotional and quantitative equilibrium.

Always use Stop-Loss and Take Profit Levels

Stop-Loss

👉 Most traders lose money, but the goal towards which they work is to make greater profits that will outweigh the losses once the trading day ends. One way to ensure that profits are more than losses is by using a stop-loss and take-profit.

👉 You may use a stop loss to safeguard your transactions against unexpected market fluctuations by specifying a price at which the deal will end.

👉 The transaction will be closed to avoid additional losses when the asset meets your stop-loss price if you entered the market hoping for a gain in the asset’s value.

👉 One thing to keep in mind is that stop-loss orders do not guarantee a profit. There are times when the market acts unpredictably and exhibits price gaps.

👉 There could be a situation in which the planned stop loss level is not performed, but it is triggered the following time it is reached, resulting in slippage.

👉 An excellent guideline for setting stop losses is a percentage loss of no more than 2 percent on any particular transaction. The loss margin should never be increased after the stop loss has been established. In the absence of efficient use, there is no purpose in having a safety net in place.

👉 In Forex, there are a variety of stop-loss orders. Depending on your trading style and level of expertise, you can choose between the following:

➡️ Margin Stop

➡️ Chart Stop

➡️ Equity Stop

➡️ Volatility Stop

➡️ Trailing Stop

👉 If you notice that you are constantly losing money while using a stop-loss, evaluate how many of your previous stops were hugely beneficial to your trading. To improve your trading outcomes, level adjustments could be all that are needed.

👉 You can also safeguard your gains by placing a precautionary stop order. A $500 floating profit can be moved closer to your stop loss to ensure that if it is reached, your trade will finish with part of your profit.

👉 In addition, you could keep trailing the stop after the price if the transaction continues to go your way using a “Trailing Stop.”

Take Profit

👉 A take profit is quite identical to a stop loss, but as its name implies, it serves the opposite function. A stop loss is meant to automatically cancel deals to avoid future losses, while a take profit is designed to close trades once they reach a predetermined profit threshold.

👉 By having realistic expectations for each trade, you may not only establish a profit objective and, therefore, a take profit, but also determine the risk level that is acceptable for the transaction.

👉 Most traders aim for a reward-to-risk ratio of at least 1:2, where the predicted profit is double the risk, and they are prepared to take on a trade.

👉 Consequently, if you put your take profit 40 pips higher than your entry price, you would place your stop loss 20 pips below your entry price, or half the range. Thus, you must consider the levels you want to achieve on the upside and what degree of loss is reasonable to tolerate on the downside.

👉 This will help you keep your discipline during intense market conditions where prices fluctuate faster and more drastically. It will also inspire you to consider the relationship between risk and reward.

Do not trade on emotions or “gut” feelings

👉 In trading psychology and risk management, there are numerous commonalities. Emotional self-control is a need for successful forex trading. Emotional control when trading is essential for making the kind of earnings you are looking for in the market.

👉 Emotional traders have a challenging time adhering to trading rules and techniques. Traders who are too pessimistic about the market’s direction may fail to exit losing positions promptly.

👉 After realizing their error, traders should exit the market with the least amount of loss feasible. Waiting too long might result in a significant loss of cash for the trader. To re-enter the market, traders must be patient and wait for a legitimate chance.

👉 Traders who have suffered a loss and are still reeling from it are more likely to execute riskier deals to make up for their losses. Having a winning run might cause a trader to get arrogant and cease adhering to appropriate Forex risk management guidelines.

Make sure to use diversification

👉 When it comes to risk management, you cannot put all your eggs in one basket, as the saying goes. To protect yourself if one of your assets loses value, you should diversify your investments throughout several other markets.

👉 Subsequently, limiting your exposure to Forex to only a part of your overall portfolio may help you minimize your risk. Exchanging many currency pairs is another strategy to grow your business.