Currency Trading In India, popularly known as Forex trading, is one of the world’s largest financial markets with a daily volume of a whopping $6.6 trillion.
Like trading in stocks, Currency Trading in India involves a higher level of risk. As a result, it is quite hard to understand for new traders. If you’re also new to it or want to learn – What is Forex Trading? Read our guide to know everything about it.
Before moving further, firstly, we have to understand the basics of currency trading. It is a trade between two currencies. So, forex trading is entirely different from the stock market, where you can trade in a single share. But in currency trading, you must buy one currency and sell another.
For instance, the EUR/USD rate shows how many US dollars one Euro can purchase. So you buy Euros with US dollars if you believe the Euro will appreciate versus the US dollar and sell it back when the exchange rate rises, and you cash in your profit.
What is Forex Trading?
Forex trading can be defined as a network of buyers and sellers who exchange currencies at a predetermined price. It is the process by which people, businesses, and central banks change one currency into another.
Mostly, the foreign exchanges are done in order to make a profit. However, because of the large volume of cash exchanged every day, some currencies’ price changes can be quite volatile. This volatility is what makes forex so appealing to traders: it increases the possibility of large earnings while simultaneously raising the risk factor too.
How Does Currency Trading In India work?
Currency Trading in India is being regulated by SEBI (Securities and Exchange Board of India) and RBI (Reserve Bank of India), which means it is legal. In addition, Currency futures can be traded on renowned exchanges such as the NSE, BSE, and MCX.
Currency pairings available for trading in India include:
To start forex trading in India, the trader must first create an account with the broker. Then, the trader’s job is to forecast how the exchange rate will move. And, if a trader sees signs that the rupee is strengthening versus the dollar, he or she will buy it.
If the trader’s prediction goes right and the value of the rupee rises, he or she can sell it to profit. On the other hand, if the dollar’s value increases, it may lead the trader to lose a portion of his or her investment. In the end, the trades are cash-settled and do not require any physical delivery.
Understanding The Basics
To better understand Currency Trading, first, you should be familiar with the few frequently used terms in the Forex market, including:
- Bid & Ask
- Lot Size
What is Bid & Ask in Forex Trading?
Forex quotations will always include a bid and ask price. These are critical in terms of the base currency; let’s see how.
Bid: The price at which you want to sell a currency is referred to as a Bid. A market maker often places bids in response to buyer inquiries in a particular currency. Usually, bid prices are lower than Ask prices, but in some cases, they can be higher than Ask prices.
Ask: The lowest price at which you want to acquire a currency is known as an ask. For example, if you put an asking price of $1.3891 for GBP, that value represents the lowest price you are ready to pay for a pound in USD. In most cases, the Ask price is more than the bid price.
What are Pips in Currency Trading?
A “percentage in point” is referred to as a pip. It is the minimum price change in currency markets, equal to four decimal points. For instance, 0.0001 is equivalent to one pip. One dollar is equal to 10,000 pips. The pip value might differ based on the broker’s normal lot size. Each pip will have a value of $10 in a $100,000 standard lot. Because traders use a lot of leverage in the currency market, even the small price changes (measured in pips) can have a significant impact on the trade.
What is Spread in Currency Trading?
In Forex Trading, the spread is referred to as the difference between the bid and ask price. Suppose, if the bid and ask price for USD/INR is 72.725/72.728, the spread is 0.003 (73.725-73.728). As most brokers are offering commission-free trading, they earn money through spreads. While online brokers are also offering low spreads on trading, their size may get influenced by a variety of factors, including currency demand, market volatility, and the size of your trade.
What is Leverage?
The utilization of borrowed funds to invest in a currency, stock, or investment is known as leverage. In forex trading, leverage is quite a common term.
Investors can trade more significant positions in a currency by borrowing capital from a broker. Consequently, leverage increases the gains from positive changes in the exchange rate of a currency.
On the other hand, it is a two-edged sword: it may multiply gains while also magnifying losses. To minimize the losses in forex trading, traders must understand how to control leverage and use risk management tactics.
Professional traders better know how to control leverage, but it’s pretty complicated for beginners. As a new trader, we suggest limiting your leverage up to 10:1.
What Does Margin Mean in Currency Trading?
The fund set aside in an account for currency trading is referred to as Margin. Even if the deal does not go as planned, margin money ensures the broker that the trader will stay solvent and able to satisfy financial commitments.
The Margin is stated as a percentage of the total position in most cases. For example, trade on EUR/GBP could just require 1% of the entire amount of the position to be paid in order to be started. You will simply need to deposit AUD$1000 instead of AUD$100,000.
What Refers To a Lot Size In Currency Trading?
Lots are the common unit of measurement for currency trading. Standard, mini, micro, and nano are the four most prevalent lot sizes. The money is divided into 100,000 units in standard lot sizes.
On the other hand, the currency is divided into mini lot sizes of 10,000 units and micro lot sizes of 1,000 units. Traders can also buy nano lot sizes of currencies, which are 100 units of the currency.
Currency Trading in India: Risks Elements
Currency Trading holds a lot of profit for knowledgeable investors but involves a higher level of risks at the same time. Some of the most impacting elements that increase the risk to this trade include the following.
Here are some of the risk factors that traders should be aware of before investing in Currency Trading in India.
Unlike the stock market, Forex trading follows a different strategy, which requires a minimal initial deposit (also called Margin). However, the leverage on the investment gives traders access to a vast number of trades, and even small fluctuations might result in the investor having to pay an extra margin. As a result, market instability mixed with excessive leverage can be extremely risky for traders.
A risk that arises when a counterparty’s deliberate or involuntary activity results in the non-repayment of an outstanding currency position. Credit risk is typically associated with banks and businesses, although it is quite minimal for individual traders.
Traders must be aware of these forex risks, as well as those linked to the exchange rate, liquidity, nation, transactional, and danger of disaster.
While interest rates have a complicated influence on a country’s currency, their value differentials can generate significant fluctuations in forex prices.
In the Indian currency market, there are many forex brokers that are not trustworthy; consequently, you should only create a trading account with a reputed and globally-operated broker such as ABInvesting and InvestBy.
Pros and Cons of Currency Trading in India:
- Low Entry:
Because there is no minimum capital requirement, anybody can start a currency trading account. Your broker will provide you leverage up to 1:100, which means that if you have Rs 10,000 in your forex trading account, you may take positions up to Rs 10 lakh.
As the information on currency fluctuations and interest rates is freely available in the market, long-term insider price manipulation by market participants or central banks is unlikely.
- High Leverage:
In simple words, a short-term loan issued by your broker against the amount in your trading account is known as leverage. A small trader may take huge positions in the currency market and achieve infinite profits with leverages as high as 100x.
- Low Transaction Fees:
In the equity markets, brokers charge a percentage of total trading volume, which reduces your profit margin. The spread, or the gap between the bid and ask price in currency trading, is how brokers make money. The Indian brokers offer low transaction fees.
- High Volatility:
The fluctuations in currency value occur nearly every second amid geopolitical conflicts or elections. Even a 1 or 2 pip shift in the wrong direction might cause investors to lose a lot of money.
- Less likely to be regulated globally:
While the RBI and SEBI jointly regulate currency trading in India, the market is far less likely to be regulated by global financial regulators. Banks and brokers control the worldwide currency market, leading to frauds, unfair pricing manipulations, counterparty concerns, and other issues.
- High Leverage:
This factor is considered a double-edged sword as it may lead to double your losses as it does with the profits. As a result, it’s critical to know your risk tolerance and handle your money wisely.
Best Forex Brokers in India for Beginners:
If you’re too in search of the Best Forex Broker in India for Beginners, we have two top recommendations for you: InvestBy and PrimeFin. Despite their recent entry into the currency trading market in India, both companies have proven their worth in a short span of time.
With features such as high leverage, low spreads, and advanced trading experience, InvestBy and PrimeFin are emerging as the best brokerage platform on the internet. Below is the detailed overview of both companies to better understand which one suits your requirements.
InvestBy, emerging as Best Forex Broker in India, offers a pleasant trading experience to both beginners and professional traders. The company operates under the brand name TechFX LLC, which is regulated by the National Bank of the Republic of Belarus (NBRB).
By offering advanced and user-friendly trading platforms such as MetaTrader 4 (MT4), Webtrader, and Mobile trading platforms (Mobile App), InvestBy has become the first choice of every Indian Investor.
Features of InvestBy:
- Leverage up to 1:500
- Low Spreads starting from 0.03 pips
- No additional or hidden fees
- Dedicated customer support in 11+ languages
- Islamic account
Although PrimeFin is relatively new to the Indian Forex market, it has already demonstrated that it provides one of the top services on the market.
The company is legitimate, and a global regulator body regulates it. Primefin is one of the Best Forex Brokers in India for Beginners, with unrivaled safety and security features, and is highly recommended by many.
Features of PrimeFin:
- Advanced Trading platform
- Offers cross-platform trading
- Best for Beginners as well as professional traders
- High leverage
- Tight spreads
- Dedicated customer support
Although currency trading in India has attracted a lot of attention due to its features, a lack of knowledge about this can be quite risky. Any trader who wants to profit from currency trading must have solid knowledge and comprehension of global economies.
Above, we have provided all the information regarding currency trading and how does it work? So, before trying your hand in Forex Trade, make sure you have read this article till the end without skipping any point.
How to Start Currency Trading in India?
You can easily start Currency Trading in India by opening a Forex Trading account with a reliable and reputed broker such as PrimeFin or InvestBy.
Is Currency Trading in India profitable?
Currency Trading can earn you high profits if you know all the basics, strategies, and tools of Forex Trading.
Is Currency Trading Tax-free in India?
The income generated through Currency Trading in India will be taxed as business income.
Which is the more profitable Stock market or Forex Trading?
Forex trading is typically preferred by short-term traders with minimal capital. However, for people who are new to trading and want more consistent profits over a longer period of time, the stock market can be a better choice.
Is there any punishment for Currency Trading in India?
Currency Trading is regulated by SEBI and RBI. Hence, it is totally legal.