The dollar exchange rate has been traditionally volatile and recent global factors have put tremendous pressure on the INR. This has resulted in a steep depreciation over the period of 2022-2023. However, with many new traders entering the markets, there has been an uptick in currency trading as well. So what are the basics of currency trading and how can you start currency trading in India? Here’s your beginner’s guide to currency trading
Read More: Currency ETFs – All you need to know
What is currency trading?
Currency trading, also known as foreign exchange or forex trading, involves the buying and selling of currencies from different countries with the aim of making a profit. In India, the most commonly traded currencies are the
- US dollar
- Japanese Yen, and
- British Pound.
The basic concept of currency trading is to buy a currency at a lower price and sell it at a higher price or to sell a currency at a higher price and buy it back at a lower price. The difference between the buying and selling price is known as the “spread,” and this is where traders can make a profit.
Trading hours for currency trading in India
Currency trading in India takes place in the foreign exchange market, which is open 24 hours a day, 5 days a week. The timings for currency trading in India are from 9:00 AM to 5:00 PM, Monday to Friday, when the Reserve Bank of India is operational. However, the forex market operates globally, which means that trading can happen around the clock.
The exchange for currency trading in India is done primarily through the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). These exchanges provide a platform for trading in various currency pairs such as USD/INR, EUR/INR, GBP/INR, and JPY/INR, among others. Traders can participate in currency trading through online platforms offered by brokers.
It’s important for new traders to understand the risks involved in currency trading, as it can be highly volatile and unpredictable. It’s advisable to start with a small investment and gradually increase it as you gain experience and knowledge.
How to start currency trading in India?
The process to start currency trading in India is similar to trading in any stocks or other securities. The steps involved in starting currency trading in India are mentioned below.
1. Learn the basics
Before a trader starts currency trading, it is important to have a good understanding of the market and the various strategies used to make trading decisions. This involves studying basic terminologies such as pips, lots and spreads, and then moving on to more advanced concepts like technical analysis, fundamental analysis, and risk management. Traders can access the abundant resources available, like online courses, webinars, and articles that can help you learn about currency trading or offline material like books and seminars, etc.
2. Choose a broker
Selecting the right broker is crucial for success as a currency trader. Traders should look for a broker that is licensed and regulated by the Securities and Exchange Board of India (SEBI) at the same time provides a reliable trading platform with a user-friendly interface. Another factor important while selecting a broker includes those offering competitive fees and low spreads, as they have a direct impact on the profits.
3. Open a trading account
After selecting the right broker, traders can open a trading account by filling out an online application form and providing the necessary KYC documents such as ID proof and address proof. The broker will then verify these details and activate the account once the verification process is complete.
4. Fund the trading account
Once the currency trading account is activated, traders need to deposit the required funds into it. The amount to be deposited will depend on the minimum deposit required by the broker. Some brokers do not require additional funds to be poured in and traders can use the existing trading account and funds used for stock trading. Additional funds if needed can be put into the trading account using any of the payment modes offered by the broker like NEFT, RTGS, UPI, credit/debit cards, etc.
5. Select a currency pair
The next step in this process is to choose the currency pair to trade in. For example, if a trader thinks the USD will strengthen against the INR, they can buy USD/INR. Traders can trade in pairs such as USD/INR, EUR/INR, GBP/INR, and JPY/INR, among others offered by the exchange.
6. Execute the trade
Once the currency pair is selected, traders can execute their trade by placing a buy or sell order. Traders can also set a stop-loss order to limit their losses and a take-profit order to lock in profits.
7. Monitor the trades or the portfolio
Keep an eye on the trades and adjust the trading strategy as and when necessary. Traders need to stay up-to-date with market news and events that can affect the currency markets which is why it is important to have a trading plan and stick to it to avoid emotional trading.
What are the currency trading strategies used by traders?
Some of the common currency trading strategies used by traders include,
This strategy involves identifying the overall direction in which a currency pair is moving and trading in line with that trend. Traders use technical analysis tools to determine the trend and enter or exit trades accordingly.
This strategy involves trading based on news releases that can have an impact on the currency markets. Traders use economic calendars to stay informed about upcoming news releases and enter trades based on the anticipated market reaction.
This strategy involves identifying a price range within which a currency pair is trading and buying when the price is close to the lower end of the range, and selling when it’s close to the upper end of the range. This strategy works best when the currency pair is trading in a sideways market with no clear trend.
This strategy involves identifying important levels of support or resistance and entering trades when the price breaks through these levels. Traders use technical analysis tools to identify these levels and use stop-loss orders to manage their risk.
This strategy involves buying a currency with a higher interest rate and selling a currency with a lower interest rate. Traders hold onto the currency with the higher interest rate for a prolonged period, with the expectation of earning a profit on the interest rate differential.
Currency trading is not new to the Indian markets and was formally launched in 2008 when currency futures were introduced and currency options were introduced in 2010. Currency trading is a very volatile form of trading as compared to stock trading. This is on account of multiple global factors affecting currency fluctuations and the constant need to monitor the markets 24/7. It is therefore important for traders to have a thorough understanding of these factors and their impact on the currency to have effective and profitable trading portfolios.
Currency trading can be done in many forms in India which is essentially through the spot market and futures and options market or by trading in currency-specific ETFs
Currency trading is legal in India and is regulated by the Reserve Bank of India through the Foreign Exchange Management Act. Indian residents can trade in approved currency pairs through authorized dealers or brokers. However, currency trading is subject to restrictions and regulations (such as limits on trade amounts and the use of only Indian rupees for margin payments) which must be followed by traders to avoid legal issues
As per SEBI, forex trading in India is permitted with only four currencies namely, the US Dollar (USD), Euro (EUR), Great Britain Pound (GBP), and Japanese Yen (JPY), and they can only be traded in pairs with the Indian Rupee (INR). The available currency pairs for trading in India include USD/INR, EUR/INR, GBP/INR, and JPY/INR. Cross-currency futures and options contracts on EUR-USD, GBP-USD, and USD-JPY are also open for trading
Traders in India can participate in currency trading through authorized dealers or brokers and the market is regulated by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are the main exchanges for currency trading in India, with online trading platforms also available through brokers