What is Currency Trading ?
Currency Trading is popularly known as Forex (FX)Trading in the financial markets. Currency Trading occurs in the foreign exchange market, one of the oldest in the world. It is a global market, one of the largest in terms of volumes, and the most liquid financial markets globally. The daily trading volume in the currencies market is approximately USD 7.5 Trillion.
The Currencies or FX market is open 24 hours a day,5 days a week. Global financial institutions based in different time zones like London, New York, Sydney, and Tokyo essentially manage the forex market.
Currency trading is entirely different from traditional trading, which takes place in the equities or commodities market as it is because currency trading across the globe happens in pairs. This means that when buying one currency, you are simultaneously selling the other.
For example, in the USD/INR currency pair,( USD-base currency, and INR-quote currency/counter currency)if you buy the pair you are long USD and short INR .
The currency pair with the most trading volumes globally is the EUR/USD. Other major currency pairs are USD/JPY, USD/GBP, USD/CAD, and others.
In India, forex trading is permitted for retail investors only in the INR-based currency pairs. These pairs include USD/INR, GBP/INR, EUR/INR, and JPY/INR. These pairs are closely monitored and regulated by both the RBI and SEBI.
Key features of Currency Trading in India
Regulated by RBI and SEBI
The Securities and Exchange Board of India(SEBI) and the Reserve Bank of India(RBI) regulate India's forex market, ensuring transparency and investor protection. It also brings standardization to the Indian forex market.
Trading in Derivatives
In India, forex trading occurs in the futures and options market on recognized exchanges like NSE(National Stock Exchange), BSE (Bombay Stock Exchange), and MCX-SX.
Settlement in Indian Rupees
Despite the underlying involvement of foreign currencies, a market participant on the indian currency exchange who incurs a profit or a loss, the derivate contracts are settled in Indian rupees. It simplifies the transactions for all traders and investors, removing the need to have foreign currency accounts.
Margin Requirement
You must deposit margin specified by the exchange to participate in forex trading, similar to trading activities in derivates in other segments like equities and commodities.
Forex Trading Account
You must first activate the segment with your broker. Make sure you trade currencies with a SEBI-registered broker only.
Trading the Currency market
Trading in the currency market is crucial for a thriving global economy. It is an integral part of the global financial system and supports international trade, investment, and economic stability.
Promote International business
Currency trading lays the foundation for international trade. Companies engaged in international trade can pay for goods and services from other countries.
Global investments
Currency trading makes investments in any part of the world smooth, transparent, and efficient, supporting global business activity .
Role of the Central Bank
The global forex market helps the central bank of a country control the flow of money in the economy . This ensures that a balance is maintained to support economic growth.
Transparent prices
The constant flow of information and global trading activities contributes to everyone knowing the forex exchange rates.
Forex trading occurs in India from 9 am to 5 pm; Monday to Friday except on designated public holidays. You must open a trading account with an activated currency trading segment to trade in the Indian forex market.
Key terminologies used in Forex trading
Before you start trading in the currency market, you must be aware of the terms used or linked to the currency market :
Currency pair : Represents the relative value of the base currency with quote currency. In other words, how much quote currency is required to buy one unit of base currency
Base currency : The currency which is quoted first in a pair. For example, USD/INR, USD is the base currency (a.k.a. first currency).
Quote currency : The currency after the base currency is called the quote currency. For example, in USD/INR, INR is the quote currency.
Pips : It is the smallest unit of price movement or price fluctuation a currency pair can make.
Spread : The difference between the price a buyer is willing to pay and the seller willing to sell for a currency pair.
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What drives the price movements in the Forex market ?
Several factors drive the price movements in the forex market, but ultimately, it boils down to supply-demand
Key reasons
Economic Factors
• Changes in the interest rate often impact the currencies’ value. Higher interest rates attract investments from other countries, thus increasing the demand.
• Inflation in a country weakens the currency value.
• Trade balance Exports exceeding imports strengthen the currency and vice versa.
Political Stability
Political stability is often one of the most important factors for sustained development and growth in a country. A country with political instability or uncertainty will lead to a decline in the currency's value over some time.
Investor Sentiments
Investors' sentiments often play the most crucial role in the financial markets, with currency markets no different. If investors lack fundamental confidence in the long-term performance of their investments, then investment becomes pointless.
Supply And Demand
Supply and demand are the key factors that determine the price. The interaction between them determines the value of a currency. International trade and global investments in a country often influences the value of a currency.
The Reserve Bank of India (RBI) monitors the rupee value closely. It intervenes in the forex market to ensure stability and fairness in the rupee exchange rate.
Key advantages of opening a Currency Trading account
Lower Volatility
Lower volatility than the equity and commodity markets, leading to lower margin requirements
Greater Liquidity
The sheer amount of trading volume in a genuinely international market leads to greater liquidity. This results in lower spread costs.
Weekly and Monthly contracts
Weekly and monthly derivatives contracts are available for traders to trade or hedge.
Suitable For Newcomers
Currency trading is a great starting point for newcomers who want to start their trading journey with a minimum deposit.
Low Charges
Currency trading often has lower transaction charges due to the sheer amount of trading volumes. The brokerage paid, and other costs are typically insignificant.
Ideal For Hedging
You can hedge your positions on the exchange platform without documentation.
How to Open a Forex Trading account ?
Opening your demat account is now a digital process. A demat account is your first step to invest or trade in the stock markets .To activate the currency segment, you first need to have an active demat cum trading account We offer our customers a seamless,100% online account opening process, which takes just 15 minutes*. Let us understand the step-by-step process :
STEP 1
Fill in your basic personal details.
STEP 2
Upload KYC documents (like PAN, Aadhaar, canceled cheque) that are SEBI-mandated to open a Demat & Trading account.
STEP 3
The Demat & Trading account is activated after verification.
STEP 4
To activate the Currency segment, Proof of Income is to be submitted, which can be done 100% online via our app or website.
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FAQ’s
What is currency trading? How is it different from trading stocks?
Currency trading or forex trading involves buying one currency and selling the other currency. It is done in pairs, unlike stocks or commodities. In stocks when buying them, you become a part owner of the company. However in currency trading you are trading the relative value between the two currencies .
Can I trade all major world currencies like US dollars, British pounds, Euros, Japanese Yen, etc, in India?
As a retail trader, you can trade only in INR-based currency pairs, including USD-INR, GBP-INR, and JPY-INR. Currency trading without INR is not permitted .
Who regulates the currency trading market in India? Is it safe to trade the currency market in India?
Currency trading is a well-regulated market in India. Both the RBI and SEBI closely monitor it. Close monitoring and regulation aims to ensure transparency and investor protection; therefore, it is safe to trade in the currency market in india.
What are some of the main factors that affect the value of a currency?
Primarily, the value of a particular currency is affected by its global demand and supply. Economic factors like interest rates, inflation, political stability, investor confidence, etc., are other significant factors affecting its value.
How much money do I need to start currency trading?
Since currency trading is carried out through futures and options contracts, you can open a position in the currency market by paying a deposit to the exchange called the margin, which is a small portion of the total traded value. Therefore, you can start your journey with relatively little capital.
