scorecardresearchForex Trading in India: All You Need to Know?

Forex Trading in India: All You Need to Know?

Updated: 08 Apr 2022, 11:55 PM IST
TL;DR.

In India, the foreign exchange market, also known as the currency trading market, is a marketplace for exchanging international currencies. We give the lowdown of forex markets here

The Forex market is a global decentralised marketplace for trading foreign currencies.

The Forex market is a global decentralised marketplace for trading foreign currencies.

Owing to India's size, scope for innovation, and soundness of the financial sector, the Indian economy has a solid footprint and is home to many international business titans. India's strong and stable financial sector has gradually evolved from a tightly regulated to a more liberalised environment.

Behind China and the United States, it is the world's third most attractive FDI destination, according to UNCTAD's World Investment Prospects Survey 2012-14. 

Indian marketplaces provide huge opportunities and high earning potential, all while operating under strict laws. In this tumultuous environment, currency trading in India is establishing itself as a platform for trading between buyers from all over the world, at all hours of the day and night.

What is Foreign Exchange Trading ?

The Forex market, also known as the Foreign Exchange Market, is a global decentralised marketplace for trading foreign currencies. The forex market is an OTC (over-the-counter) market that determines foreign exchange rates. It also includes selling, buying, and exchanging currencies at market rates. Foreign Exchange Trading is the world's largest in terms of trade rate.

What is Forex?

Foreign exchange is the concurrent purchasing of one money and selling of another. Currencies are exchanged through a broker and are executed in cash sets. 

For instance: the Euro and the US Dollar (EUR/USD) or the British Pound and the Japanese Yen (GBP/JPY). The Foreign Exchange Market (Forex) is the biggest monetary market with an everyday volume greater than $4 trillion.

This is nearly three times the combined value of the stock and futures markets. The Forex spot market, unlike other financial markets, does not have a physical location or a central exchange. 

It works by swapping one currency for another over an electronic network of banks, businesses, and people. Because there is no physical transaction, the Forex market may operate 24 hours a day, covering many time zones across major financial hubs.

This reality - that there is no concentrated trade - is critical to remember as it penetrates all parts of the Forex experience.

READ MORE: A step-by-step guide to apply for a forex card. What are its key benefits?

What is Currency Trading?

Trade is an international activity and for all trades payments are made in currency, exclusively for the countries / regions concerned. Whenever a currency is bought or sold for another currency, the transaction is known as a "currency trading". 

Currency trading is the largest financial market in the world, followed by commodities and stocks. Investors, speculators and companies engage in cross currency transactions.

What are some of the key characteristics of India's foreign exchange market?

Transactions are inexpensive

Because of the lower online Forex trading costs, even inexperienced investors can profit. Forex traders, unlike other investment options, only charge a small fee. This commission is limited to the spread, or the difference between the buying and selling prices of a currency pair.

Increased Leverage

You can sell on margins in the Forex market, which are technically borrowed funds. Because the rate of return on your investment is increasing exponentially, the value of your investment is high. Because the Forex market is so volatile, trading with leverage (borrowed money) can result in substantial losses if the market goes against you.

Exceptionally Transparent

The Indian foreign exchange market is a transparent market where traders have complete access to market data and information needed to conduct deals. Open market traders have more control over their investments and can make better educated judgments based on the information available.

Convenient access to the Forex Market

You may access your foreign currency trading account from anywhere if you have an internet connection. You have the ability to trade at any time and from any location. The Forex market has an advantage over other markets because traders can position trade transactions at their leisure.

What is a Forex Trading account?

A forex account is a type of bank account that keeps deposits in one or more currencies maintained with a financial institution or broker for the purpose of speculating on currency market movements.

What Factors Should You Consider Before Opening a Forex Brokerage Account?

Leverage

The multiplier, or X times the margin for which you can take a position, is known as leverage. 

For example, if you have $10,000 in your account and a 10 times leverage, you can take a position for $10,000 x 10 times = $100,000. With leverage, you can make a high profit on a small investment. However, if the transactions go wrong, the losses are multiplied.

To put it another way, the bigger the leverage, the greater the risk.

Fees and Commissions

You do not have to pay fees on each Forex trade, unlike stock trading. Forex trading is conducted without the use of intermediaries and instead engages directly with market makers. 

The spread on a currency pair is what distinguishes one firm from another. It could be as small as one pip (0.0001), but with a high volume, it can make a big difference. Larger spreads allow you to capture or lose more pips.

Other Considerations

The many degrees of services and programmes offered to differentiate a privileged member, as well as the fees charged, are other aspects to consider when choosing the best forex broker in India. 

In addition, there are education support and training programmes available. The forex brokerage houses are market participants who are regulated. Check to see how many countries the company is governed in.

In what ways, forex trading in India take place?

Purchasing and Reselling

Currency pairings can be bought or sold with the notion that their value will rise and as a result, you'll profit. As an example, suppose you bought a pair at 1.2936. If the value rises to 1.2937 or higher, you will benefit; if the value falls to 1.2635 or below, you will lose money.

Using Derivatives

The use of derivatives on currency pairs, such as futures and options, is another way to trade in forex. Purchasing a futures contract generates an obligation to purchase the underlying currency pair at a predetermined point in the future. 

Purchasing an option on a currency pair, on the other hand, gives you the right to buy the currency pair at a predetermined price before a preset date in the future. In options, you are purchasing the rights and must exercise them before the fixed future time and date.

What are the processes to start currency trading in India?

  • Create a forex trading account with a regulated broker that does not charge account opening fees.
  • Follow the Customer KYC (Know Your Customer) guidelines.
  • Make a deposit for the needed margin.
  • To begin, obtain the necessary access credentials from your broker.

What are the Most Popular Forex Trading Currencies in India?

The US Dollar (USD)

The USD is widely accepted in trade and business around the world. The US dollar is extremely liquid, and it is the most traded currency in the world, with a pair for every major currency.

The Euro (EUR)

The Euro is the world's second most traded currency and the second most important reserve currency for trade and commerce. In a eurozone, the Euro is widely utilised as a shared currency by a number of countries.

The Japanese Yen (JPY)

The Japanese yen is Asia's most widely traded currency. The strength of Japanese manufacturing exports is reflected in the Yen.

Pound Sterling (GBP)

Due to its tremendous liquidity, the Great British Pound is the fourth most traded currency. Because of its close ties to peers such as the USD, the GBP has a high value.

The Canadian Dollar (CAD)

The Canadian Dollar is the most important commodity currency in the world. The CAD has a strong relationship with crude oil and the US dollar.

The Swiss Franc (CHF)

Because of its negative association with the Canadian dollar, Australian dollar, and US government yields, the Swiss Franc is seen as a safe haven in FX markets.

The Australian Dollar (AUD)

Among the other popular currencies, the Australian dollar has the greatest yield. The Australian dollar has a link to commodities such as gold and silver.

What are the most important causes of currency fluctuations?

Employment Data

A significant growth in employment implies that the country's economy is thriving, which can have a good impact. While reductions are a sign of possible contraction, the data may cause the currency to fall in value. Economic data and currency movement are frequently influenced by the circumstances that exist at the time the data is released.

Rates of Interest

Higher interest rates tend to attract foreign investment, raising the value of the domestic currency. Lower interest rates, on the other hand, are undesirable to foreign investment, lowering the currency's relative worth.

Inflation

Price increases are indicators of inflation, which causes the home currency to decline.

Gross Domestic Product (GDP)

GDP is a metric that gauges a country's economic health. The healthier a country is, the more foreign investment it draws, which leads to a rise in the currency's value.

Capital Flows and Trade

Large monetary flows between countries are created by exports and imports, which have a significant impact on the value of respective currencies. A country with more imports than exports will see its currency depreciate because it will need to buy foreign currency by selling its own.

What are the different types of forex markets in India?

Spot Market

Transactions involving currency pairings happen swiftly in this market. Transactions in the spot market demand quick payment at the current currency rate, sometimes referred to as the ‘spot rate.' Traders in the spot market are not susceptible to the FOREX market's uncertainty, which might affect the price of a deal or an agreement.

Futures Market

Future market transactions, as the name suggests, entail payment and distribution in the future at a previously agreed-upon exchange rate, also known as the future rate. 

The formality of these agreements and transactions ensures that the terms of the agreement or transaction are set in stone and cannot be modified. Future market transactions are preferred by traders that undertake large forex transactions and need a constant return on their holdings.

Forward Market

Forward market trades are the same as future market trades. The fundamental distinction is that in a forward market, the terms are negotiated between the parties. The agreement's provisions can be adjusted and tailored to meet the interests of the parties involved. The forward market provides flexibility.

What are the possible reasons for the Forex market's economic boom?

  • The introduction of future derivatives in Forex trading sparked a bullish trend in India's currency trading sector.
  • Individuals and investors now have access to trading, which was previously solely available to banks and huge corporations.
  • Currency trading in India has risen dramatically as a result of liberalisation, which has given banks and enterprises more flexibility in holding and trading foreign currencies.
  • Relaxing trading laws hastened the integration of global and local economies, necessitating the use of derivatives to control risk.

What should you keep in mind when trading in the Forex Market?

Recognize your trading style

Each currency trader has his own trading approach. This is in line with the risk profile of the trader. Before you start trading on a regular basis, make sure you know who you are.

Select the appropriate broker and trading platform

In forex trading, having a reputable broker is critical to your success. When it comes to forex trading in India, a professional broker will hold your hand and keep you informed about live currency market news.

Know your limits

Before you engage in any currency trading, determine the trade's entrance and exit points. Because no transaction is a guaranteed thing, be ready to double down or exit if the scenario becomes negative.

Take away

Due to its size, volume, and frequency of trade, currency trading in India is a substantial contributor to the national economy. Because the economy is made up of small and large enterprises, anything that benefits the firm, enhances the national economy.

 

First Published: 08 Apr 2022, 11:55 PM IST