Months After Pivotal Presidential Elections In Nigeria, Here’s How Index Traders Are Managing Risk

Bola Tinubu promised a hands-on approach toward the country’s monetary policies, foreign investors have started showing growing confidence through their trades.

Bola Tinubu - Index Traders
[Credit: Nosa Asemota under License CC BY-SA 4.0. No changes were made to the image.]

Nigerian trading markets are now showing signs of recovery after a period of high volatility during its recent election season. As expected during impending political movements, the market had cautious traders as Nigeria waited for its next president-elect. Today, with the instated Bola Tinubu promising a hands-on approach toward the country’s monetary policies, foreign investors have started showing growing confidence through their trades.

As financial reforms seem to be on the horizon for Nigeria, traders prepare for market unpredictability once again. Index traders are specifically on the watch as their trades hinge on the movement of an entire economy. This has encouraged them to adopt smart practices to mitigate their effects.

The Nigerian Presidential Elections and Its Effects On Index Trading

Nigeria is currently the largest market in Africa. For years, it was considered an ailing economy due to high inflation, debt, and gas shortages. With the naira already weak, the country faced another crisis as the government changed the currency design right before the elections in February. Many speculate that this was done to prevent rampant vote buying, but it led to an even more chaotic social climate as cash became scarce. All of this contributed to the continuous downward trend of trading indices at the time.

The election of President Bola Tinubu signalled a new fiscal approach for the country. One of his most impactful amendments included the immediate replacement of the disputed Godwin Emefiele as the governor of the Central Bank of Nigeria (CBN). Tinubu cited theft and corruption as the primary reasons behind this move, stating that he would work towards unifying the Nigerian exchange rate instead.

Both foreign and local investors have responded positively to this, as observed in how the Nigerian stock market soared and reached record numbers last observed 15 years ago. Along with this, indices rose significantly, with rates in the banking sector jumping to 23% following Emefiele’s suspension. Yet despite this promising turnaround, index traders are well aware that the trading landscape experiences fluctuations through political adjustments. With the current president pledging more fiscal reforms, they’re now moving to protect themselves from risk using the following strategies:

How Index Traders Manage Risk

Choosing platforms carefully

With the popularity of trading comes the prevalence of fake brokers and scammers. When trading indices, investors know to choose a reliable trading platform that will impose certain measures to protect their users, such as increasing margins and reducing leverage to mitigate the negative effects of high market fluctuations. A good indicator for such a platform is if it offers renowned indices globally, such as the FTSE 100, Dow Jones Industrial Average, and the S&P 500. Carrying out index trading safely on a trusted platform allows traders to minimize risks and instead focus on maximizing their returns.

Utilizing stop-loss orders

Trading is always accompanied by risk, so index traders always start by determining their risk parameters first. Once they’ve established how much they’re willing to potentially lose or gain, then they turn to their chosen trading platform’s automated features to impose these bounds. They do so by setting stop-loss orders right as they open a deal to indicate at what price point their orders should be closed. In the case of a sharp decline, stop-loss orders protect traders by automatically closing their trades without waiting for their go signal. It’s a valuable risk management tool that helps index traders manage their assets effectively.

Diversifying investment portfolios

Though trading indices are recommended due to their relative stability compared to other assets, individuals still run the risk of overexposure and significant losses when they only focus on a single index. Thus, investing in other asset classes and indices is popular among experienced index traders. It controls risks as other assets may offset losses and significantly reduces the panic involved during high market volatility. Just as how Nigerians were able to bounce back by turning to digital currency when the naira had fallen, it shows how markets move differently. By having a diverse portfolio, investors protect their capital and reduce trading risks.

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