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Foreign exchange, or currency trading, is a decentralised global market where all currencies of different countries are traded and bought. The largest financial market in the world is the foreign exchange market. In the same way as stocks, you can buy or sell a currency based on your opinion of its value or simply predict where it will go. The trading of foreign exchange is permitted at the exchanges in India, such as BSE, NSESX, and MCX.
In India, foreign exchange trading is underrated, but a complete strategic plan and a legal framework can be financially fruitful. What is forex trading in India? What does it mean? What are the risks and opportunities? How does one trade forex in India? These are the topics that we will cover in this article. Let’s read ahead.
Table of Contents
Understanding Forex Trading Meaning
The word ‘forex’ stands for foreign exchange. Therefore, converting one currency into another is known as forex trading. There are several motivations to carry out the exchange, including promoting global trade, tourism, or business objectives.
- Foreign exchange, or foreign exchange trading, is the exchange of currencies, such as purchasing US Dollars with Indian Rupees.
- We need efficient channelling to cover imports and receive foreign currency through the sale of exports.
- To pay for the necessary imports with sufficient currency, governments, central banks, commercial banks, corporations, brokers, foreign exchange dealers, and individuals participate in currency purchasing and selling and lending, hedging, or exchanging currencies.
- However, the currencies’ prices are highly volatile because of the large volume of daily trading.
- Consequently, while a profitable return can be obtained on the foreign exchange market, there is also an inherent risk factor. This is what’s making the market attractive.
How Does Forex Trading Work?
The forex trading market is the only trading market to operate constantly with no interruptions on a global scale. The market for foreign exchange trading has historically been dominated by large banks and investment firms acting as intermediaries for their clients. But in the last few years, retail traders and investors of all sizes have been increasingly able to access this market.
Foreign exchange trading is about buying and selling currency pairs like EUR to USD or JPY to GBP, whereas other financial instruments are traded like stocks. Foreign exchange trading is characterised by the fact that it involves one currency being exchanged for another. To make a profit, you sell one currency, expecting its value to decrease relative to the currency you intend to buy, which you desire to increase in value.
Basic Forex Trading Strategies
Long and short foreign exchange trading is defined as a fundamental type of trading.
- When traders are trading long, they bet that the value of their currency pairs will rise to make a profit.
- On the other hand, in a short trade, the trader is betting that the currency pair’s price will fall, thereby creating a profit.
To adjust and improve their trading patterns, traders may also use strategies based on technical analysis, such as the breakout or moving average. As a result of the number and duration of transactions carried out, trading strategies can be classified into four types.
Scalp Trading
Scalp trade is characterised by holding positions for a few seconds or minutes, with profit margins limited by the number of pips.
Day Trading
Day trading refers to short-term positions bought and sold in a single day, lasting for hours or minutes.
Swing Trading
Swing trading involves holding positions longer than a day, such as a few days or weeks.
Position Trading
Position trading involves holding a currency for an extended period, such as months or years.
Advantages of Forex Trading
Leverage
Leverage is simply a short-term loan that your broker provides you with in relation to the amount on your trading account.
Transparency
There is little chance of long-term insider price manipulation by central banks or market players since currency and interest rate data are easily accessible in the market.
Low Entry Barriers
Forex trading offers relatively low entry barriers, allowing individuals to engage in trading with minimal capital. Unlike some other financial markets that demand substantial initial investments, forex trading often permits opening an account with a relatively small sum. This accessibility enables traders with limited funds to participate in the market.
Low Transaction Costs
A broker charges a percentage of overall trade volume, impacting equity market profit margins. For currency trading, the profits of brokers are spread by the difference between bid and ask prices.
Volatility
The forex market is known for its liquidity and volatility. This volatility presents numerous trading opportunities for investors to capitalize on price movements. Fluctuations in currency pairs occur due to various factors like geopolitical events, economic data releases, and market sentiment.
24-Hour Market
The forex market operates 24 hours a day, five days a week across different time zones worldwide. This continuous operation allows traders to react to global events and news immediately, providing ample opportunities to enter and exit trades at their convenience.
Global Accessibility
Advancements in technology have made forex trading more accessible to retail traders. Online trading platforms, educational resources, and the availability of demo accounts have lowered the barriers to entry, enabling traders from various backgrounds to participate in the market.
Diverse Trading Options
The forex market offers a wide range of currency pairs to trade, providing diversity and flexibility in investment choices. Traders can choose from major currency pairs (like EUR/USD, GBP/USD), minor pairs, or even exotic currency pairs, allowing them to explore different market dynamics and trading strategies.
Drawbacks of Forex Trading
Limited Regulations
The forex market operates globally and is decentralized, resulting in varying levels of regulation and oversight in different jurisdictions. In some regions, including India, there might be limited regulatory frameworks governing forex trading, which can expose traders to potential risks such as fraudulent activities by unregulated brokers, lack of investor protection, and difficulty in resolving disputes.
Risk
Forex trading involves high volatility due to factors such as geopolitical events, economic indicators, and market sentiment. While volatility can present trading opportunities, it also amplifies the risks associated with trading. Sudden and significant price movements can result in substantial gains or losses, especially when using leverage.
How to Trade Forex in India?
As an Indian citizen, you can trade foreign exchange (FX) through a margin account with a foreign broker (ideally one that is regulated and reputable) or through a broker registered by SEBI that provides exchange-traded currency derivatives.
Conclusion
Forex trading, a global marketplace for currency exchange, operates non-stop and provides diverse investment opportunities. Traders buy and sell currency pairs, aiming to profit from value fluctuations influenced by geopolitical events and economic indicators. Despite potential high returns due to liquidity and leverage, it carries risks like volatility and regulatory uncertainties. Success demands a grasp of basics, strategic application, effective risk management, and adaptability to the market’s dynamics. To commence forex investing, a reliable broker’s guidance is essential. Consider exploring Share India’s online trading platform for a start in foreign exchange trading.