
Cryptocurrencies and forex are among the most sought-after
financial markets by Nigerian traders. Given the fact that the Central Bank of
Nigeria postulates that over 500 million dollars are traded monthly on forex
trading platforms and molecularly, Nigeria is among the top 10 countries that
adopt cryptocurrencies, Nigerian citizens are actively involved in the trading
market systems of the world. And while others aim at techniques, markets, and
opportunities for profit-making, one factor is neglected most of the time —
liquidity.
Liquidity remains central to defining trading success,
especially in some of the most dynamic and unpredictable areas such as crypto
and the forex market. Nigerian traders need to know about crypto trading
liquidity and forex trading liquidity to handle the fluctuation of prices and
to avoid risks related to the order of the trading. This article goes further
to look at why liquidity is important, how it can affect the trading results
and how it can affect the experiences of Nigerian traders in emerging markets.
What is Liquidity in Trading?
Liquidity is defined as the ability to purchase or sell
assets at the market and consequently not affect the prices of the assets. High
liquidity has many customers hence easy transaction and with many sellers, many
individuals can supply the commodity at almost the same price. However low
liquidity generally results in greater volatility in prices as well as trading,
increased spreads and the possibility of having difficulties with the
implementation of certain trades.
Liquidity in Crypto Trading
Indeed, what determines the liquidity of crypto assets in
Nigeria include the trading frequency, the number of outlets where such deals
are conducted, and the legal frameworks regulating those outlets. Some of the
most established sites offering the likes of Bitcoin and Ethereum have good liquidity,
but this is not well experienced in the small coins more so those trading at
low volumes resulting in high volatility.
Liquidity in Forex Trading
Currency markets are generally more liquid than other types
of markets because of their size—the forex market turnover is more than $6.6
trillion per day (Bank for International Settlements, 2022). But much has to do
with currency pairs because the trading volume of some currency pairs is
considerably higher than that of other currency pairs. This means that major
pairs such as the EUR/USD will have higher liquidity than other exotic pairs
such as the NGN/USD which can in turn make the prices of currencies fluctuate
frequently and the cost of trading turns out to be expensive to most traders in
Nigeria.
Why Liquidity Matters for Nigerian Traders
1. Liquidity and Trading Volume
Of special importance to the traders is trading volume that
is directly related to liquidity. Higher levels of trading usually mean
improvements in price volatility and spreads which bring down the traders’
transaction cost of entry and exit. In Nigeria, virtually every trader lacks
capital depth and therefore reducing the cost of trading is of paramount
importance.
2. Liquidity and Price Volatility
Liquidity also affects the market by increasing the price
fluctuation rather than making it easy to forecast market changes. This is
especially devastating in Nigeria’s crypto trading, which is already reactive
to ambiguous legal structures. While high liquidity disrupts volatility, making
it easier to predict trading conditions on the market.
3. Liquidity and Order Execution
Order execution is largely a function of liquidity. It is
also a market in which transactions occur rapidly and at the stipulated price
to meet an order. But in less active markets the traders encounter slip prices
which is a difference between the actual trading price and the desired one. If
you are a Nigerian trader involved in forex or crypto using leverage, slippage
means significant loss.
4. Liquidity and Trading Costs
Due to low liquidity, there is a high cost of trading since
long tails are associated with a wide bid-ask spread. While these extra
expenses may appear minimal to some, the average Nigerian traders who operate
under very thin profit margins well know that such costs can reduce their
bottom line over time.
5. Liquidity and Risk Management
Liquidity is one of the most important aspects of the
management of business risks. In a liquid market, traders can quit positions in
the early stage of any unfavorable market environment. However, when positions
are hard to exit because of low liquidity this exposes the dealers to market
risks.
Liquidity Challenges in Emerging Markets
For traders in emerging markets like Nigeria, liquidity
challenges are more pronounced due to:
- Currency Restrictions: A scarce supply of forex and policy
measures can decrease the forex pair liquidity in the case of NGN/USD.
- Market Fragmentation: Having numerous trading platforms
operating at different levels of intensity causes daily volatility in the
crypto market.
- Regulatory Uncertainty: The fluctuations in the policies
concerning the adoption of cryptocurrencies and forex trading affect market
activity hence ’’Liquidity.’’
Strategies to Navigate Liquidity Challenges
1. Focus on High-Liquidity Assets
Nigerian traders must focus on trading highly liquid
instruments, concerning major currency pairs like EUR/USD or some new
crypto like BTC.
2. Use Reliable Platforms
It also takes time to identify trading platforms that have
free and deep liquidity and good order execution. Looking for broader exchanges
such as Binance or other global exchanges as well as those that are connected
with P2P can be more effective deals in the crypto space.
3. Monitor Market Depth
Market depth is defined as the total quantity of bids and
offers in various price tiers. In less liquid markets analysis of market depth
can be used to understand the condition of the specific market and plan one's
actions accordingly.
4. Adjust Trading Strategies
It is considered that traders should adjust their strategies
according to the liquidity of the market. For example, low trading volume means
that it is best not to conduct fast or monster trades that may affect the
market.
5. Leverage Liquidity Tools
Some examples of measuring and managing the effective
availability of funds include Liquidity pools in decentralised finance (DeFi)
or Liquidity indicators on trading platforms.
Case Study: Nigerian Trader in Crypto and Forex Markets
Let me take the example of Ada, who is a Nigerian crypto and
forex trader. She was already experiencing low liquidity of the NGN/USD pair
and had a high tendency of slippage with higher trading costs. To address this:
- She moved to EUR/USD which has higher liquidity and a
narrower spread than the pound used in most of her trades.
- In trading, she limited herself to crypto such as bitcoins
and Ethereum rather than low-liquid altcoins.
- She also increased the quality of her order flow by trading
better liquidity-containing contract trading platforms such as Binance.
- Ada’s approach enlightens us on the ways that the knowledge
of liquidity and the control of liquidity can be fundamental in improving
trading performance.
The Future of Liquidity in Nigerian Markets
As Nigeria’s financial markets mature, liquidity is expected
to improve through:
1. Increased Market Participation: In the retail trading
platform, improved adoption of forex and cryptocurrency trading among retail
and institutional investors will improve liquidity.
2. Regulatory Clarity: Cryptocurrency and forex trading:
more participants, better market depth where there are clear policies in place.
3. Technological Advancements: A range of solutions based on
blockchain technology like decentralized exchange can supply liquidity in the
crypto market while AI-based algorithms are in the process of creating the
liquidity in forex market.
Conclusion
Liquidity is not just an academic concept, it’s a strategic
component of trading especially commodities like crypto and forex for the
people of Nigeria. Liquidity encompasses all aspects of order execution,
including the cost of trading and the risks of the process.
It is for this reason that any Nigerian trader seeking to
engage in the trade of assets should focus on high-liquidity assets, identify
reliable trading platforms, and ensure that they use tools that will help them
analyze the depth of the market. To succeed in decentralized and centralized
markets, it is crucial to comprehend the crypto-fiat trading liquidity and
forex trading liquidity to succeed in both markets in the long run.