With stock trading being extremely popular, people in India still lack information on a highly profitable platform known as the forex market. Though traders have fewer options when it comes to currency trading in India, they can still make decent returns by understanding the basics of the forex market. Today, I discuss ten basic things that you need to know before trying your fate with currency trading in India.
10 Basics of Currency Trading in India
1) What Is Currency Trading?
The exchange of currencies in a decentralized market by following a systematic process is called currency trading. Several participants including but not limited to central banks (Reserve Bank of India), hedge funds, intermediaries, individual and corporate traders make the currency market work. In India, forex trading is one of the popular and legal methods to make quick profits.
2) What Are Currency Market Futures?
Currency market futures is another domain of currency trading. It enables traders to diversify the risk of rapid price fluctuation involved in currency trading. In futures trading, traders enter a contract to buy or sell an underlying asset in the future at the present market rate.
3) Why Currencies Fluctuate?
Multiple factors contribute to currency market fluctuations including interest rates, geopolitical tensions, and other socio-economic factors. However, the mechanism of supply and demand is the prime reason for the price fluctuation of currencies. For example, if there is an increased demand for the Indian Rupee (INR), its price will increase. Similarly, if the market is in excess of the Indian Rupee (INR), then its price will decrease.
4) How many Tradable Assets are there In the Currency Market?
Forex trading revolves mainly around 18 currency pairs, which is too small in numbers compared to the equity markets where traders can access thousands of tradable stocks. In India, traders are allowed to trade currency derivatives, such as futures, options, and swaps, instead of spot trading. Earlier, you could trade four currency pairs, including USDINR, GBPINR, EURINR, JPYINR derivatives through exchanges or RBI & SEIBI regulated brokers in India. However, three more currency pairs became part of permissible currency pairs after the RBI announced a new ruling concerning tradable derivatives in 2015. These cross-currency pairs include EURUSD, USDJPY, GBPUSD.
5) What Are The Main Derivatives Of The Currency Market?
The derivatives of the currency market include options trading, futures trading, spot trading, and spread betting, etc. In India, spot trading is prohibited. Indian traders can trade currencies in other derivatives.
6) What Are The Basics Of Currency Trading?
There are a few things traders need to keep in mind concerning currency trading.
- Currencies always have to be traded in pairs.
- Each currency pair consists of a base currency and a quote currency.
- Quote currency always comes after the base currency in a currency pair.
Traders make profits by price speculation in the currency market. If you think the price of an underlying asset might rise in the coming days, you can make a profit by buying the pair around the prevailing price. Conversely, if you think the underlying pair might depreciate over time, then selling it around current levels and buying it back at cheap rates will help you gain some profits.
7) What Are the Requirements To Start Currency Trading in India?
To start currency trading in India, you need to follow the listed steps.
- Sign up for a live trading account with an exchange regulated broker. Please note that currency trading in India is allowed through registered brokers only. Make sure that your broker holds registration with the Reserve Bank of India (RBI).
- Complete the KYC (know your customer) process to verify your identity.
- Deposit funds in your account.
- Download the trading platform, and start trading.
8) How Does the Currency Market Work?
The currency market is also known as the forex market. It’s a decentralized market with no regulatory authority governing it. According to an average estimate, the forex market is the world’s largest market with a daily trading turnover of above 6.6 Trillion U.S. Dollars.
Forex trading involves three main parties, including traders, Forex brokers, and the market (liquidity providers). Brokers connect traders to the market. The currency market works on the mechanism of demand and supply. You can trade different currency pairs in the forex market that includes, major, minors, and exotic pairs.
The currency pairs having USD as a base or quote currency are known as major pairs. As far as currency trading in India is concerned, traders can only trade pairs involving Indian Rupees in addition to three cross currency pairs, such as EURUSD, GBPUSD, AND USDJPY.
9) What To Remember While Trading In The Currency Market?
Following a specific trading strategy with proper risk management is key to success in the currency market. Given below are some significant factors that you must remember while trading the currency market.
Broker Selection – The selection of a regulated broker is essential to trade currencies in India. Please note that trading with an unauthorized broker is a non-bailable crime in India. You can be sentenced to imprisonment if found in violation of the country’s regulatory framework amid forex trading.
Pricing Models – There are not many options available for currency trading in India. Therefore, you must consider the pricing structure of the broker before being on board with it. Your broker should have a competitive fee structure. There is no point in opening an account with a broker that doesn’t hold value for money.
Trading Platform – Trading platforms also play a significant role in the success of a trader. A user-friendly trading platform having all basic and advanced trading tools available can make your trading experience worthwhile.
10) What Are The Risks Associated With Currency Trading?
Forex trading is generally known as a riskier form of investment. It is one of the most liquid markets in the world, having high volatility. Besides having a great potential to yield quick returns over a short period, it can also lead you to incur severe losses in no time. Also, traders should avoid using high leverage. It doesn’t only enhance traders’ market exposure but also magnifies the risk of loss. It can be very dangerous for newbies. Hence, for starter it is always ideal to try out demo trading account before putting your money at risk.
There are more things to learn than what we have covered above. Click the following links to learn more about the specific topics for example Best Time To Trade Forex, How To Start Forex & Currency Trading, as well as its legality: Is Forex Trading Legal In India?