Forex trading is one of the most popular investment options in India. Since the forex is the world’s most liquid market in the world, therefore it allows retail and institutional investors to generate speedy returns on investment. Like any other business, forex trading also involves some limitations that need to be considered before investing the hard-earned money. In this piece, I take a look on how to start forex trading in India.
Before moving to the subject matter, let me first highlight a few points that I am going to discuss in this article.
- What is forex trading?
- What are the basics of forex trading?
- How can you start forex trading in India?
- Who can trade the forex market?
- What type of trading strategies can you use to trade forex successfully?
- What is the best time to trade forex in India?
What is Forex Trading?
The process to buy and sell foreign currencies systematically in an over-the-counter market is called forex trading. Investors exchange currencies for various reasons, including hedging, arbitrage, and speculation. However, profit-making is the ultimate objective of forex trading.
What are the basics of forex trading?
To master currency trading, you need to be well informed about the basics of currency trading. To make the basics of forex trading clear in your mind, here I list a few frequently used trading terminologies;
- Currency pair: A combination of base and quote currency makes a currency pair. In a currency pair, base currency (Indian Rupee) always comes before the quote currency. For example; INR/USD, INR/JPY, etc. Also, currencies always have to be traded in pairs.
- Bid & Ask: The price at which you can buy the currency is called the bid price. While the price at which a currency can be sold is known as the “Ask” price.
- Spread: Spread is the difference between the ask and the bid price. Spreads are charged by brokers as a compensation fee for their services.
- Pip: Pip is read as Point in Price. It is the smallest unit to measure the price movement or exchange rate of a currency pair.
- Lots: As opposed to the equity market where traders can buy shares in numbers, currencies are purchased and sold in lots.
- Leverage: Leverage enables clients to trade big positions with limited investment. It is also known as margin trading.
How can you start forex trading in India?
Getting started with forex trading in India is simple. You need to open a trading account with an authorized broker in India. Given below are a few steps you can follow to start forex trading in India.
- Connect to the internet.
- Find an authorized broker.
- Sign-up for a real account and deposit funds.
- Access the currency market using a forex trading platform.
- Start placing trades.
Let’s look into the steps in a bit more detail.
Step 1: Internet Connectivity
Since you can only access the forex market online, therefore, a stable internet connection is a must. Effective forex trading involves instant trade execution which can’t be done with problematic internet connectivity. Also, any sort of delay after the initiation of an order can make you lose a trading opportunity.
Step 2: Finding an Authorized Broker
The forex market is full of good and bad forex brokers. You need to be careful while selecting a forex broker. Always go through the following checklist before making your final decision.
Make sure that;
- The broker holds SEBI authorization in India.
- It is a well-known forex broker.
- It has a competitive pricing structure.
- It offers instant trade execution.
- It has a user-friendly trading platform.
- It offers multiple deposit and withdrawal options.
- It offers quick customer support service.
- It offers free demo account
Step 3: Opening a forex trading account in India
Account opening can be a lengthy process with some brokers. Adherence to KYC compliance might even consume more time before you could start forex trading. However, some brokers offer a quick registration setup.
Not to mention, forex brokers need to verify your identity to comply with directives of law enforcement and anti-money laundering agencies. You can use the following documents to prove your identity;
- National ID card/ Passport / Driving License
- Utility Bill
- Bank Statement
You can start forex trading within a few minutes to an hour after submission of the mentioned above documents. It depends upon how quickly your broker verifies your account. You also need to fund your account once it is verified. Your broker is likely to have multiple methods available for depositing funds in your account, including debit/credit cards, e-payments, bank transfers, etc. Most brokers in India need you to deposit 100 INR to get started. Some might ask a little more or less.
Step 4: Access the forex market using a forex trading platform
You need a forex trading platform to connect to the forex market. Usually, brokers offer multiple trading platforms that you can use on both desktop and mobile phone. Trading platforms that come with real-time quotes are known to be effective for currency trading in India. Other features of a trading platform such as market insights, charting, and risk management tools etc, also help traders to be successful in trading. Not to mention, MetaTrader 4 (MT4) and MetaTrader 5 (MT5) are considered to be the best trading platforms that you can use to get started.
Step 5: Placing your trades
Once you are done with all the above mentioned steps, you can start placing trades in the forex market right away. If you are an experienced trader then the market is all yours. In the forex market, you can find unlimited trading opportunities. If you are a beginner, then I would suggest;
- Start low.
- Don’t use leverage unless you have gained sufficient trading exposure.
- Never risk more than 1 percent to 2 percent of your funds on a single trade.
- Devise a workable trading strategy and stick to it.
- Don’t make hasty trading decisions.
Who can trade in the Forex market?
Forex market is for all. You don’t have to be from a specific origin or ethnicity to trade forex. However, jurisdictional restrictions and the availability of tradable products may vary from country to country. Generally, traders are classified into three types, including hedgers, arbitrageurs, and speculators.
Hedgers trade the forex market to diversify their risk exposure. Hedging allows traders to open opposite positions to cancel the effect of unfavorable exchange movement. Profit-making might not be the priority of hedgers, they specifically want to limit the risk of loss. Usually, central banks, import & export dealers, and corporate clients fall under this category.
It is the most common type of forex traders. The main objective of speculators is to make profit by speculation on the movement of exchange rates. Unlike hedgers, speculators don’t care much about the foreign risk, they are more interested in buying or selling currency derivatives to generate some quick cash. Indian forex market is known to be one of the favorite forex markets for speculators.
Arbitrageurs’ main objective is to capitalize their funds on the difference in prices of the same currency derivatives across all exchanges that support currency derivatives in India. They make profits by buying derivative contracts at cheap rates from one exchange and sell them on the other exchange at profit. Usually, arbitrageurs tend to sell their positions more often since they don’t prefer holding long positions.
What type of trading strategies can you use to trade forex successfully?
Traders have to devise a trading strategy that suits their needs. There is no specific trading strategy that stands fit for all. All traders have their unique style of trading. A trading strategy that works for some traders might prove disastrous for others. Also, some traders prefer day trading while others show more interest in scalping. Listed below are some common strategies that may be useful for almost all types of traders;
Price action trading
In price action trading strategy, traders study the historical movement of a currency price and decide the resistance and support levels accordingly. The price action strategy works in nearly all time frames, including short, medium, and long term. It also works in all market conditions.
Position trading is a little complex in nature. You need to be patient to benefit from the position trading strategy. In this strategy, traders take long positions and make profits from major price movements.
Day trading strategy is by far the most practiced trading strategy across all markets. It is also called intraday trading strategy and is one of the famous trading strategies amongst investors. Traders close their open positions at the end of a trading day. Since it’s a short-term trading strategy, therefore, fundamental analysis is not required. Only technical analysis can work well for day traders.
Scalping involves making profits with small price movements. Scalpers buy and sell currencies more frequently than other types of traders. Mostly, scalpers close their positions within a few seconds to a maximum of one minute. This trading strategy might sound easy but can drive you nuts. Scalpers have to stick to the screen all the time so they may not miss even the smallest profit-making opportunity.
What is the best time to trade forex in India?
The best time to trade forex starts when two market sessions overlap. It is the time when the maximum number of participants makes the market highly liquid. I’ve converted the time of different overlapping trading sessions into the Indian Standard Time below;
- US/London Overlap: 3:30 PM to 7:30 PM
- Sydney/Tokyo Overlap: 9:30 AM to 11:30 AM
- London/Tokyo Overlap: 10:30 AM to 11:30 AM
Pros and Cons of Forex Trading
Besides forex trading being one of the most effective ways of generating hassle-free returns, it also has some cons that you should consider before starting currency trading in India. Listed below are a few pros and cons of forex trading;
- Leverage – Leverage is generally known as a favorable trading instrument for traders. It enables traders to trade big lots with minimal capital investment. However, it also increases the risk of loss and can be damaging for novice traders. Please note that leverage trading is not allowed in India.
- Highly Liquid – The forex market is one of the most liquid markets in the world. It enables traders to sell their positions quickly without causing significant price deviation.
- Decentralized Market – Because the forex market is decentralized, therefore, the chances of price manipulation are minimal.
- Riskier form of Investment: Forex trading is generally known to be a riskier form of investment. The market sometimes behaves unprecedentedly, leaving even the most experienced traders helpless. Also, leverage can make the situation even worse for newbies.
- Uncertainty – Since the fluctuation in the prices of currencies occurs due to several geopolitical factors, therefore a surprise price move can happen anytime. A sense of uncertainty always prevails in the forex market.
Frequently Asked Questions (FAQs)
Do I need to open a Demat account for trading forex in India?
No, you do not need to open a Demat account. Currency trading in India is cash-settled. The deliverance of physical currency is not involved in trading currency derivatives such as futures and options.
Which is the best trading platform for forex trading in India?
Each trading platform comes with some pros and cons. However, the best trading platform should be user-friendly. It should have all the basic and advanced level trading tools required for purposeful trading.
Who Regulates the forex market in India?
The Reserve bank of India regulates the forex market in India under the FEMA ACT 1999. Being the central bank of India, the RBI is responsible for all key approvals.
Is there any difference between forex trading in india and currency trading in India?
No, both forex trading as well as currency trading are the same in India and all over the world. The only difference is how two words are written or pronounced. Otherwise, both refer to the same thing.