A Beginner’s Guide to Forex Trading in India

The foreign exchange market, known as the forex market, is the international market for exchanging foreign currencies. It is the world’s largest financial market and it can greatly influence the price of daily-use items. Forex trading is also referred to as currency trading, and its popularity is steadily increasing in India but many investors do not have a clear understanding of what it is.

You can go through this beginner’s guide to forex trading to learn about the technicalities associated with it. 

What is Forex Trading?

Foreign exchange or Forex is the exchange of currencies, i.e., changing one currency into another. Tourism, commercial reasons, and international trade are important avenues where foreign exchange plays a crucial role. If you have bought foreign-made goods or exchanged currencies for travelling abroad, you have taken part in forex trading.

Understanding the underlying concept of forex trading is important before delving into more details. Firstly, Forex trading occurs in the forex market, the world’s largest and most liquid financial market. Secondly, to carry out forex trading in India, traders typically use currency derivatives such as futures and options. In India, forex trading is regulated by both the Reserve Bank of India (RBI) and the Securities Exchange Board of India (SEBI). It occurs primarily on 3 exchanges—Bombay Stock Exchange (BSE), the National Stock Exchange (NSE), and Metropolitan Stock Exchange of India Limited.

Participants of Forex Market 

Some of the main players in the forex market include the following entities: 

• Governments and central banks
• Commercial banks 
• Companies
• Brokerage firms
• Hedge funds
• Retail forex traders
• Speculators 

Important Forex Trading Terms 

Detailed below are some of the crucial terms associated with forex trading. Knowing these terms would make it easier for you to participate in the forex market: 

• Currency Pairs

Forex trades involve a currency pair, i.e. a forex market transaction takes place when there is a simultaneous buying and selling of two currencies. There are 3 different groups of currency pairs—major currency pairs, minor currency pairs, and exotic currency pairs. 

Major currency pairs drive the forex market and are the most commonly traded. Its examples include EUR/USD, GBP/USD, USD/JPY, and USD/CHF. The US dollar is not a part of minor currency pairs which are generally less liquid than major currency pairs. Exotic currency pair involves one major currency & one minor currency  and are considered to be riskier and less liquid & have a wider spread.

• Pip

Percentage In Points (PIP) is the smallest price movement within a currency pair. It is an important term because, in the forex market, prices are quoted to a minimum of four decimal places (the only exception being the Japanese Yen and the Thai Baht where pip is the second decimal place). The minimum pip is equal to 0.0001.

Often, currency trades of very high amounts take place in the forex market. So, even the smallest price difference can be equivalent to significant profits or losses.

• Bid and Ask Price

The highest price at which a forex trader is willing to buy a currency is called the bid price. It gets provided in real time and constantly gets updated because the forex market is a live market. 

Meanwhile, the ask price is the lowest price at which a forex trader accepts to sell a particular currency. Just like the bid price, the ask price is also provided in real time and undergoes constant change influenced by market forces.

• Lot Size

Currency derivatives are traded in lots like stock derivatives. The minimum unit that forex traders can buy and sell under a contract is known as lot size. Globally, the lot size is typically 1,00,000 currency units. But, micro (1000) and mini (10,000) lots are available as well for forex trading. In India, you can purchase a single lot which consists of 1 unit on the exchange market.

• Spread

The difference between the bid price and the ask price is known as the spread. Market exchange rates are determined based on the maximum amount traders are willing to pay (bid price) for buying a currency and the minimum amount that sellers are willing to accept (ask price). 

• Leverage and Margin

Smaller traders often fail to take part in forex trading when they see huge lot sizes. Here is where the concepts of leverage and margin help retail traders participate in the forex market.

The underlying concept of leverage is that traders need to pay only a fraction of the amount instead of the entire amount. Margin is the amount traders need to pay upfront as a deposit to access leverage facilities. In other words, with leverage, traders can trade for more than what they hold in cash.

• Base Currency and Quote Currency 

Every currency pair consists of a base currency and a quote currency and a backward slash separates these pairs. While base currency is the one on the left, the one on the right side of the slash is the quote currency.

Traders can purchase or sell in exchange for base currency and it is for one unit of base currency. For instance, in EUR/USD, USD is the quoted currency and depicts how many US Dollars traders can get for 1 unit of EUR, which is the base currency. 

What are the advantages of Forex Trading ? 

• It is good for beginners in trading 

The Forex market is a good option if you are a beginner and wish to invest a small amount. Many brokers offer demo accounts to traders, which is a major advantage for beginners. You can use this account to experiment with currency trading in market simulation before initiating real trades. 

• Exposure to a large and global market

The forex market is the largest financial market with traders from all over the world participating in it. Huge amounts of money get exchanged in the currency market daily and so, traders can make good profits from favourable price movements. The forex market is also transparent and offers a very efficient price discovery.

• Option of liquidity

Financial experts and traders consider the forex market to be the world’s most liquid market. Assets can be considered very liquid if traders can buy and sell them with minimum or zero impact on their value. Liquidity enables forex traders to participate in the market with a nominal risk of delay. 

• No restriction on directional trading

In the forex market, traders engage in purchasing or selling currencies depending on the market situation. So, if you predict a price change, you can go long or sell short easily, because there is no restriction on directional trading. 

• Low transaction charges 

You can start forex trading with small capital in India. Most importantly, the transaction costs are not huge. It only includes the broker’s fee. Traders can also use percentage points or pips to measure the impact of spreads.

• Advantage of technology 

With the development of new technology, forex trading has become more accessible. Multiple software programs and mobile applications are available that facilitate easy forex trading across the world. 

How to Trade Forex in India? 

Step 1: Open a Currency Trading Account 

The first step is to select an appropriate forex trading broker platform and open a currency trading account. In India, you will not be able to engage in forex trading without this account. While opening a Demat account is not necessary, most brokers provide traders with a two-in-one account, i.e. when traders open an account they receive the facility of both trading and a Demat account.

Step 2: Submit KYC Documents 

You need to submit all the documents required to complete the KYC process. You will need to submit proof of identity, address, income, and bank account details. Once you submit every necessary document, the forex trading platform will take some time to verify your application. Shortly after, you will receive a mail informing you of approval or rejection. 

Step 3: Choose a Currency Pair 

As mentioned above, currency trade takes place in pairs. Generally, beginners trade the most commonly offered pairs of major currencies. But, if you are willing and have enough funds in your trading account, you can trade any currency pair of your choice. 

Step 4: Read the Quote

When you engage in forex trading, you will get to see two prices, i.e. bid and ask currency. It is important to analyse the price quote properly. While the first price is the one with which traders buy a currency, they sell a currency with the second price. 

Step 5: Pick a Position 

Study the market movements well and pick a position. Forecasting currency movements is an important part of forex trading. Suppose you see INR strengthening against USD, you might wish to buy it to make profits.

It is important to keep in mind that successful forex trading requires knowledge and experience, both of which traders gain over time.  

What are the Forex Trading Strategies Used by Traders?

Forex traders use multiple strategies to maximise their profits while minimising losses. It is important to understand that while any given set of strategies will not bear fruit for all those who employ them, here are some of the most common ones that are most widely used in Forex trading:

Carry Trading

This long-term strategy involves holding a currency with a higher interest rate while selling one with a lower rate. The goal is to profit from the interest rate difference over time.

Trend Trading

This approach involves identifying and following the direction of a currency pair’s movement. Using technical analysis, traders spot trends and time their entry and exit in harmony with these trends.

Breakout Trading

Recognizing critical support or resistance levels and initiating trades when prices breach these thresholds. Traders employ technical tools to spot these moments, coupled with stop-loss orders to mitigate risk.

News Trading

Traders capitalize on market fluctuations triggered by major news releases. By closely monitoring economic calendars, they anticipate and react to potential market shifts following significant news events.

Range Trading

This technique is applied in a stable market, where traders buy at the lower spectrum of a price range and sell near the higher end, exploiting the currency pair’s consistent trading range.

Forex Trading Hours in India

In India, currency trading happens during weekdays from 9;00 AM to 5;00 PM, which coincides with the hours of the Reserve Bank of India. This trading mainly takes place on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) where different currency pairs like USD/INR, EUR/INR and others are available for trading. While the Indian market follows these hours, the global forex market operates 24/5, offering opportunities for trading.

Risks Associated With Forex Trading 

• Interest Rate Risk

An increase in interest rate increases the demand for and value of the currency of the particular country. However, a sudden decline in the interest rates will drastically bring down the currency value due to the rapid withdrawal of investments.

• Transaction Risk

Transaction risk, which is the result of time differences between the commencement and settlement of a contract, is a significant risk associated with forex trading. Internationally, forex trading takes place round the clock and exchange rates can change any time before the settlement of a trade.

• Country Risk

The exchange rates in many developing countries are influenced by a major currency, like the USD. The central bank of the developing nation must have enough reserves to maintain the exchange rate. The currency of the developing nation may experience a considerable devaluation if there are ongoing payment deficits. In turn, this has an impact on FX market prices.

• Leverage Risk

Forex traders may need to pay additional amounts as margin if the price fluctuates and results in margin calls. In a volatile market, aggressive usage of leverage may result in losses.

Final Word

To sum up, the forex market, which deals with the exchange of foreign currencies, is the largest financial market in the world. In India, both the SEBI and the RBI regulate forex trading. Trading of currencies offers multiple benefits to investors including large-volume trading, high liquidity, and low transaction costs.

In this blog, we have discussed the important terminologies and other basic details of forex trading, with the aim of making this topic easier for beginners.

Frequently Asked Questions