What Is Forex Trading? How Does it Work?
Forex trading is a process of exchanging currencies with an aim to make profits. Normally, trading takes place in a decentralized market, called the Foreign Exchange (Forex) market. With over 6 trillion U.S. Dollar volume every day, the Forex market has become one of the most attractive places for financial investments. Forex trading in India is, however, still in the evolution phase. Forex traders in India are allowed to trade INR-based currency pairs only.
The market value of currencies keeps changing over time due to different socio-economic factors. Hence, the variation in prices allows traders to make profits with currency exchange. It is important to note that currencies in forex trading are exchanged in pairs i-e INR/GBP, USDJPY, etc. A currency pair always has two currencies with the former being the base and the later is known as the quote currency.
The decision to buy or sell depends on traders’ perception about the future price movement of the underlying currency pair. Forex traders use multiple methods to draw conclusions about the expected price movements of underlying pairs. Price action analysis or commonly known as naked chart analysis is the most widely used trading analysis method to identify the future price direction of underlying assets..
Let’s try to understand the concept of forex trading with an example;
Suppose you have 10,000 Indian Rupee (INR) in hand and want to trade a currency pair INR/JPY. You feel that soon the value of the base currency might depreciate due to some reasons such as socio-economic or political factors, then you might want to sell them at today’s current market price and make profit by buying back at a cheaper price.
On the other hand, if you think that the base currency might appreciate over time, then you might want to buy the currency at today’s price and sell it later at a higher price, allowing you to earn some profit . That’s how the forex trading works.
Pros And Cons of Forex Trading
Forex trading is known to be an easy form of investment that yields high returns. However, there are always some cons associated with any form of investment. Let’s discuss a few pros and cons of forex trading in detail;
- Leverage – Leverage allows traders to gain increased market exposure with small funds. Unlike other investment opportunities where the loan approval process can be lengthy, access to leverage in forex trading is quick and easy. Generally, regulated brokers offer a leverage up to 1:30 to help clients maximize their returns.
- High Liquidity – The forex market is known to have higher liquidity levels compared to other investment markets. Clients do not have to wait long to liquidate their positions. High liquidity also eliminates the risk of major price deviations.
- Decentralized Market – The decentralization of the forex market makes forex trading less prone to price manipulation as compared to stock and equity markets where insider information can result in huge surprises.
- High Volatility – Despite being risky, high volatility can help professional traders to make decent profits thanks to effective money management strategies.
- Variety of Tradable Currencies – Forex trading allows traders to choose between a wide range of tradable FX pairs, including major, minor, and exotic currency pairs. This brings diversification in your investment portfolio.
- Minimum Capital Requirement – Unlike other businesses where you need a huge capital to start, forex trading can be kicked off with a deposit of as low as $50.
- Demo accounts – The opportunity to test your trading skills without losing your real funds is only possible with forex demo accounts. You don’t have such a great facility available in any other investment market.
- HighLeverage Risk: While leverage allows clients to have bigger market exposure, it also leads to magnified losses. If you are new to the forex world, then the use of high leverage can become even more disastrous.
- Uncertainty – The price movement of currencies depends upon different geopolitical and socio-economic factors. Therefore you cannot have an absolute degree of confirmation concerning price trends. An element of uncertainty always prevails in forex trading.
How To Start Trading Forex in India
Forex trading in India is subject to various restrictions. Forex traders in India can trade only limited currency pairs i-e. INR-based pairs. Also, high taxes on forex earnings is yet another constraint for the Indian forex traders. However, despite unfavorable trading conditions, India based forex enthusiasts always manage to find their way into forex trading.
To start forex trading in India, traders need to fulfill three essential requirements that are;
1) A funded trading account
2) Trading platform
3) KYC compliance
You can fulfill the first-two requirements within a few minutes by signing up with a broker and downloading its free of cost trading platform. However, KYC compliance may take a day or two. All brokers require their clients to complete the KYC (Know Your Customer) process before taking them onboard. Under the process, traders need to verify their identity. The KYC process helps law enforcement agencies to stop money laundering and terror-financing activities.
A copy of your national ID card or passport may work for your identity verification. You may also use your driving license for the same. Please note that your broker might require some additional documents, including a bank statement or utility bill for address verification. Once the verification is complete, then you are all set to start forex trading in India.
Forex Trading Communities, Forums, and Discussion Groups in India
Social networking creates a huge impact on trading psychology. Interaction with other traders help you learn from their experiences. Also, some words of appreciation can act as steroid to boost up your morale. Listed below are some top forex trading communities for Indian traders;
#1 Indian Forex Forum
The Indian Forex Forum is a well-established community for Indian forex traders. The forum has multiple segments to explore, including discussion groups, forex charts, forex games, and a referral program. The best part is that the platform’s default language is Hindi. However, traders can access a translated page in English as well.
Traderji.com is another famous forum in India. The community has more than 190K registered traders from all over the world. Besides discussions on forex and stocks trading, traders also share crypto oriented knowledge here. The platform has a dedicated section to search for resources and reviews.
# 3 Indian Forex Community
With a focus to help traders improve their trading skills, the Indian forex community telegram channel can be a useful resource. Uncovering the real face of the forex world, members share their good and bad trading experiences.
Forex Influencers To Follow In India
# 1 Zia ul Haque
With over 237K subscribers on youtube, Haque is a well-known forex influencer to follow in India. By profession, he is a financial advisor with expertise in forex, stocks, and cryptocurrencies. Haque has been teaching forex and crypto trading for the past four years through his social media channels, Youtube, Facebook, and Twitter.
# 2 Anish Singh Thakur
Anish Singh is a trading expert, mentor, and motivational speaker. He is well known for his sound understanding of stock markets in India. With a focus on stock markets, Singh also provides coaching sessions on how to trade forex in India. Besides having a famous youtube channel, he also owns a website that allows traders to signup for paid mentoring sessions.
# 3 Arvind Singh
Arvind Singh is also a forex trader and an investment guru with years of trading experience. He hosts a youtube channel named Technical Avi. He helps traders learn tested forex trading strategies to start making money right away. Traders can also follow him on Instagram and Facebook.
Frequently Asked Questions (FAQs)
Is forex trading legal In India?
Yes, Forex trading is legal in India. However, there are some restrictions applicable. According to the Foreign Exchange Management Act (FEMA) guidelines, traders can only trade forex pairs that involve the Indian Rupee (INR) as base or quote currency.
What is the best time to trade forex in India?
The best time to trade forex is when two trading sessions overlap. During this time, the availability of more participants makes the market highly volatile and liquid. Given below is the timing when major market sessions overlap, timing is in Indian Standard Time (IST).
- 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
Is forex trading taxable in India?
Yes, forex trading is a taxable income in India. As per the latest GST law, tax impositions on forex earnings might vary between 5 to 18 percent.
Can you make money trading forex in India?
Yes, you can make a decent amount of returns with forex trading by employing effective trading strategies and money management rules.