What is Forex Trading?
Forex trading is also known as currency trading and it is a high potential market avenue where trades occur with foreign currency. The forex market has an average volume of around $5 trillion every day. Currency futures contracts are used for trading by investors all over the world and they allow traders to purchase or sell a specific currency on a future date which was previously fixed at a certain price.
Trading of currency futures occurs on platforms that are offered by MCX-SX, NSE and BSE.
A demat account is not necessary for forex trading but you will have to open a forex trading account with the help of a broker.
How does the Forex market work?
The most crucial point to note about forex trading is that it always happens between a pair of currencies. It constitutes taking a position on a currency pair and the currency market is a decentralised market.
The US Dollar is involved as one of the currencies in the currency pair for large trades that take place.
The demand and supply factors assist in making sure that the forex market works.
When it comes to Indian exchanges, trading is allowed in derivatives such as cross-currency futures, currency futures on 4 currency pairs and options for 3 currency pairs.
The currency futures in India are mainly cash settled and this basically goes to mean that there is no delivery of the currency that actually takes place on expiry.
How can you start Forex Trading in India?
- Traders need to create an account with an authorised exchange regulated broker.
The SEBI regulates the brokers which deal with forex trading and this is why, making sure that your broker holds SEBI regulations before signing up is vital. Ensure that your broker offers a low brokerage structure and has a good reputation amongst other forex brokers.
- Make sure that your account has been verified by completing the KYC process. The documents that need to be submitted are Passport/ Driver’s license copy/ National ID Card and bank statement or the utility bill.
- To start trading, funds need to be deposited into your account. There are various methods of payment that are made available by brokers so choose the option or mode which is most suitable for you.
- In order to be able to access the forex market, traders have to use a trading platform. Some of the most popular trading platforms are MetaTrader4, eToro, IEX and MetaTrader5.
- After you’ve completed the previous steps, sign into your account. Log in on a trading platform and you can start placing trades.
What are the Benefits of Forex Trading?
- Trading is continuous and goes on for 24 hours per day for five days a week. The hours start at Eastern time 5 pm on Sunday in the U.S. when the market in Sydney opens and trading ends at 5 pm on Friday when the last market in New York closes.
- It is the world’s largest financial market and the breadth of the market provides many benefits which include accessibility where it is easy for beginners to start trading.
- The costs of transactions are quite low and very little capital is necessary to enter it. Forex trading is cheap as the spreads are relatively low.
- Leverage can be used where traders can trade with higher amounts than they really possess in their account.
- High liquidity is present in this market and this is when assets can be purchased or sold with barely any effect on its value. As it is a global platform that works for 24 hours a day, in the entire trading world, it is the most liquid market.
- The technological advancements that have come up have helped make it easier for individuals to trade in forex from anywhere around the world.
- The flexibility which is provided is a great advantage as there is no restriction set on the amount that can be invested for trading.
What are the Disadvantages of Forex Trading?
- As the market is international, it is very unregulated and there is no centralized exchange body available to monitor and guarantee that the process of trading will be risk free.
- Maximum leverage is provided and this equals risks that can’t be accounted for. There is no limit on the movement that can happen in the market within a day and this could allow an individual to lose their entire investment.
- Managing the operations is quite difficult as the forex market runs for most of the time and algorithms have to be set up by traders to protect their investments when they are unavailable to monitor them.
Tips to remember while trading in Forex Market
- Make sure that you choose the right broker and platform as this will help in keeping you updated on news in the market.
- Understand the style of trading that you have as this is in alignment with the trader’s risk profile.
- Specifying the entry and exit points for a trade is important as having a good idea on the trade scenarios that may come into play can help minimise losses and allow investors to know their limits.
A commerce graduate who is on a mission to educate people about investment and personal finance.