what is forex trading

What is Forex Trading and How To Trade Forex in India?: Complete Guide

As of April 2022, the Bank for International Settlements estimates that currency pairs worth $7.5 trillion are traded on the global forex market daily. 

This makes the forex market several times larger than the global stock market, with the World Federation of Exchanges reporting a total of $160.95 trillion traded in the market in 2021. 

The contrast is staggering, and the forex market is the world’s largest and most liquid trading market by a long shot.

Many Indians are excited to get their piece of the metaphorical profit pie in the forex market. But it can be difficult to learn how to begin. 

So, in this post, I will discuss forex trading fundamentals that you need to know to get started.

What is Forex?

Forex – short for foreign exchange – is a global market where individuals, banks (both central and commercial), and institutions trade currencies 24 hours a day, seven days a week.

Just like you would buy and sell stocks based on whether you think their price will rise or fall in the stock market, you buy and sell currencies in the forex market.

The world’s major banks have forex departments, all of which are connected together on a 24-hour schedule. The major commercial centers of forex include Toronto, New York, London, Paris, Frankfurt, Bahrain, Milan, Tokyo, Hong Kong, and Singapore.

Indians can legally trade on the forex market via Indian exchanges such as NSE, MCX-SX, and BSE. There’s a chance that you might win big – but you could also lose it all.

Central banks globally, including the RBI in India, monitor the forex market’s movements and intervene as dictated by the government’s policies.

As mentioned earlier, the forex market is the most liquid in the world. So, it’s much easier for traders to find a buyer or seller compared to other markets.

Forex trading involves transactions in the form of currency pairs. A currency pair is formed by quoting the value of one currency against another. 

In simple words, a currency pair shows how much the “base” currency is worth in a “quote” currency.

The currencies are represented by three letters, with the first two denoting the country and the third denoting the currency’s name.

For this reason, Indian Rupees are represented as INR, United States Dollars as USD, and so on. I discuss currency pairs in further detail in the sections to follow. 

What is Currency Trading?

When a currency is bought or sold in exchange for another, the transaction is termed a “currency trade.” Currency trading is done with the sole purpose of making profits and is also sometimes called “speculative forex trading.”

The words “forex” and “currency trading” are used synonymously, but they aren’t the same since the latter is done with the specific intention of reaping profits.

Let’s say Sudeep notices a trend of rising USD prices and wants to take advantage of it to make some money. The dollar is trading at ₹81, and Sudeep expects its price to rise to ₹84 next year. 

So, Sudeep will enter a long position, purchasing a USD/INR contract on an exchange. If the price rises as expected, he will reap a profit of ₹3 per dollar purchased.

This is a simple example of profitable currency trading that would make Sudeep a profit of ₹3000 on a $1000 contract.

What are Exchange-traded Currency Derivatives?

Exchanged-traded Currency Derivatives, shortened to ETDs, are financial contracts listed and traded on regulated exchanges. To put it simply, they are a kind of regulated derivative.

ETDs derive their value from the underlying asset listed on the exchange. They are guaranteed against defaults, thanks to a clearinghouse. 

Since they are present on trading exchanges, ETDs differ from OTC derivatives in many ways. Of course, they are regulated and standardized, but they also boast higher liquidity and can be traded in the secondary market.

You must note that options and futures contracts are also ETDs. Concerning the latter, this means you can use a currency future in ETD form to trade currency on a future date at a previously decided price.

This type of derivative contract is used in India to hedge against higher-value currencies, including but not limited to USD, JPY, and GBP.

Typically, such ETDs are used by corporations with exposure to exports or imports since they hedge the corporations’ exposure to a currency.

Is Forex Trading Legal in India?

Indian citizens are not allowed to partake in forex trading on Indian territory – electronically or online. This is specified in a 2013 circular by the RBI.

But Indian citizens can legally trade on the forex market through specific foreign exchanges, with INR as the base currency.

To put it simply, the Indian government limits forex trading to currency pairs involving INR as the base currency. 

So, you can trade forex legally with any Indian brokerage that provides access to Indian exchanges such as MCX-SX, BSE, and NSE. Trading currency derivatives is also legal.

Before 2015, Indian forex traders were only allowed to trade EUR/INR, JPY/INR, USD/INR, and GBP/INR. 

However, in December 2015, the RBI permitted exchanges to offer cross-currency futures contracts and ETDs in three additional currency pairs: USD/JPY, GBP/USD, and EUR/USD.

It’s important to note that according to the FEMA Act of 1999, trading forex illegally in India can lead to imprisonment or a fine. While Indian citizens must abide by the government-imposed restrictions, NRIs are not prohibited from forex trading.

What are Brokers in Forex Trading?

Brokers are businesses that enable access to a global trading forum where they can buy and sell currency pairs. They are known as currency trading brokers, retail forex brokers, and most commonly as forex traders.

As you’d expect, most brokers work with a tiny portion of the overall forex market volume. 

Traders use brokers to access the currency market for speculation around the clock. But investment banks and other large financial organizations also offer forex brokerage services to their institutional clients.

How Does Forex Trading Work?

Forex trading doesn’t happen as an exchange like stock and commodity trading; rather, it is done directly in an OTC market. The OTC market is of three types:

  • Spot market: In this market, trading happens at the place of transaction and, as the name suggests, on the spot or for a short duration.
  • Forward market: The transactions in this market occur at a future date or in a specified range of dates. The date(s) are specified in a customized contract between the two parties trading the currencies. The exchange rate is mentioned in the contract.
  • Futures market: Like the forward market, the futures market also involves a contract to trade the currencies on a specified date and at a pre-determined rate. The main difference between them is that the futures contract is standardized and legally enforceable. Additionally, Traders can buy and sell these contracts on an exchange. 

It also helps to be aware of a foreign currency swap, which involves a forward contract. But in this currency swap, the parties swap the currencies at a spot rate. Bear in mind that the currencies are of equal value when swapped. 

Coming back to currency pairs – are classified into four categories:

  • Major pairs: These are the most popularly traded pairs. It might surprise you that only seven currencies make up 80% of global forex trading. EUR/USD is a well-known major pair.
  • Minor pairs: These are the less popular currency pairs. These typically feature one major currency against another. EUR/GBP is a good example of a minor pair.
  • Exotic pairs: These pairs involve a major currency paired against a currency from a growing economy, such as GBP/MXN. 
  • Regional pairs: These are simply the currency pairs classified by region. Examples include AUD/NZD and EUR/NOK. 

Forex trading can be done in several ways since, at its core, it’s essentially buying one currency while selling another. Conventionally, forex trading is done through a broker.

However, online trading has become more accessible and popular in recent years. 

One of the most popular ways of taking advantage of forex price movements online is with derivatives such as CFDs.

CFDs are leveraged products that allow traders – individuals and institutions – to open positions on the market for a fraction of the trade’s full value.

Remember that, unlike a non-leveraged product, you don’t get full asset ownership when you get a CFD. 

Rather, the position is handed to you based on whether the value will rise or fall – which is somewhat similar to predicting the outcome of a given set of the factual matrix based on the available data.

Though using a CFD can make you a huge profit, it will also increase the losses if the trade doesn’t go your way. For this reason, CFD trading is illegal in India.

Forex Trading According to Time Zones

I’ve put together an easy-to-read chart for you below so you can understand the time-zone division of the forex market:

Forex Trading Sessions

Trading Hours in IST

Oceania-Asia

Wellington, New Zealand

08:00-17:00

Sydney, Australia

08:00-17:00

Tokyo, Japan

08:00-17:00

Hong Kong, China

09:00-17:00

Shanghai, China

09:00-17:00

Singapore, Singapore

09:00-17:00

India

09:00-17:00

Moscow, Russia

09:30-19:00

Europe

Frankfurt, Germany

07:00-15:00

Zurich, Switzerland

09:00-17:30

Paris, France

08:00-17:30

London, United Kingdom

08:00-16:00

Johannesburg, South Africa

08:00-17:00

Americas

New York, United States

08:00-17:00

Toronto, Canada

08:00-17:00

Chicago, United States

08:00-16:00

Access to a 24-hour trading market is an apparent advantage for most traders. You can trade after work or even before your working hours begin. 

However, the 24-hour market also has some disadvantages that often go undiscussed.

One of the main disadvantages of the forex market is that monitoring positions across different time zones is challenging and impossible for most traders. 

In other words, although you may have access to this 24-hour market, there will be trading hours in which you will miss opportunities. 

Worse, if there is a change in the market’s volatility, the spot will move against your positions. For this reason, every forex trader must remain vigilant and keep track of the times when the market is most volatile. 

Once you get a feel for the market’s movements, decide what times are best for your trading pattern. 

It’s important to note that forex traders shouldn’t treat all time zones equally since there are consistent time frames when the market is particularly volatile in every session. Of course, there are also time frames when the market is completely muted.

Risks of Forex Trading

The timings are only one of the many factors that influence exchange rates in the forex market. 

The decisions of every country’s central bank are subject to the country’s internal monetary policy. Since a forex trader’s trades involving various currencies, the price of the currencies will have unexpected fluctuations. 

For this reason, forex trading is considered a high-risk endeavor, and you must tread the market carefully.

While there are several considerations, the key risk a forex trader bears is the risk of significant changes in the exchange rate. A speculator can incur massive losses if they do not choose their position correctly and monitor it timely. 

How to Trade Forex in India

Online trading platforms have made trading accessible to all, and it’s surprisingly easy to do. But for a beginner, learning the ropes can seem intimidating. Here’s my step-by-step guide to trading forex in India:

#1 Choose a Reputable Broker and Open an Account

Before you open an account with any broker, you must research its reputation and do your due diligence. More importantly, the broker should be registered with an exchange. 

The margin options and leverage offered are two other important things to consider. If the broker gives you a 10:1 leverage in your margin account, you can take a position of ₹1,00,000 with a deposit of ₹10,000. 

Some brokers are very generous with leverage, with some offering as much as 100:1 leverage. 

Such high leverages attract a lot of traders since the prospects of winning big are exciting. But remember, huge leverages also magnify the losses.  

You must also consider the fees the broker is charging for your trades. 

Make sure you find out whether the commission is fixed or the broker would rather widen your spread to profit. The spread is the difference between a currency pair’s bid and asks rates.

Consider whether the initial deposit the broker demands is comfortable for you, and double-check that making deposits and withdrawals is easy. 

Above all, remember that while SEBI registration is optional for forex brokers in India, the most trusted brokers are registered with SEBI. Registered brokers typically place their registration numbers at the bottom of their websites.

Indian forex brokers can only give you access to the four INR-based currency pairs permitted by the RBI. But you can trade cross-currency futures and options on EUR/USD, GBP/USD, and USD/JPY. 

If you’re looking to trade futures in currencies such as the Swiss Franc and the Australian Dollar, your only option is to open an account with an international forex broker. 

One of the main advantages of opening an account with an international forex broker is that they allow you to trade stocks, commodities, indexes, and crypto.

But of course, international brokers are not regulated by Indian authorities, so you need to be wary of the risks involved. 

Regardless, based on the above factors, I have shortlisted some of the best forex brokers in India for your convenience. These include OctaFX, Olymp Trade, eToro, FXTM, XM Forex, iForex, Alpari International, Forex.com, FBS, and HYCM. 

I’ve reviewed each of these brokers in detail in the best forex broker India post. Make sure you read it and weigh its pros and cons before deciding which one’s right. 

#2 Access a Trading Platform

A trading platform is what connects a trader to the forex market. Every broker offers a custom-tailored platform to allow its customers to trade. 

These days, it’s common for these platforms to be web-based, but you will likely get the option to install them on your computer and phone.

It is also possible for you to use a third-party platform to avoid getting used to the broker’s platform. MetaTrader is a popular trading platform preferred by some of the best and most experienced traders worldwide.

MetaTrader-4-User-Interface

#3 Learn Trading Strategies

Success in forex trading is dictated by the trader’s ability to predict price movements. A trader might notice the signs of INR strengthening against USD and decide to buy it. 

They can sell and make a good profit if their prognosis is correct. But if not, they will lose their money.

It’s important to understand that forex trading isn’t a get-rich-quick scheme – finding success in trading takes time, knowledge, and experience. 

New traders must rely on low-risk strategies and only bet small sums of money, so any potential losses are bearable. The forex market has high liquidity, so losing money is much easier than making it. 

Some strategies that you can rely on include:

  • Breakout Trading: If a market is trading in a narrow range, you can expect there to be a “breakout” in the price. So this strategy involves entering positions when you see this shift coming. 
  • Carry Trade: It involves studying the interest rate differential of the countries whose currencies you are trading. You have to sell the currency with the low-interest rate and buy the one with the higher rate. If you learn to do it properly, carry trading can make you a lot of profit.
  • Counter Trend Trading: As the name suggests, this strategy involves betting against the current trend to make small gains. It’s only a good idea to bet against the trend if you find strong indicators that it will invert.
  • Position Trading: An advanced strategy experienced traders use, position trading involves looking at the charts at the end of the day to find winning positions. You will need a solid grasp of the fundamentals to use this tactic. 
  • Price Action Strategy: Useful in all market conditions, the price action strategy involves using signals such as the candlestick indicator to help you find a winning price trend. It is the most popular strategy in forex trading. 
  • Range Trading: Range markets are unavoidable, making this an excellent strategy every new trader should learn. The idea is to identify the range in which the market is moving, draw resistance and support levels, and use them to determine when the trend might invert.
  • Trend Trading: This strategy aims to gauge the movement of the currency price. You can identify the right entry point with moving average, stochastic, and relative indicators. These are only some of the many technical indicators available online that you should have in your trading toolkit. 

I discuss how to do forex trading in India in further detail in our Forex trading India guide. 

#4 Start Trading

With your account ready and some insight into technical analysis, you’re ready to begin forex trading. Sign in to the account, pick a currency pair, and start betting small amounts until you profit consistently before investing large amounts. 

Daily Profit: An Exhaustive Forex Trading Course for Beginners

In the forex market, fundamental analysis can only take you so far. If you’re in it to win it and want to win every day, you will need a broader trading toolkit. 

This is especially true since investor speculation is only one factor that influences a currency’s price. 

Seasoned traders have a strong foundation in macroeconomics – they understand how factors like the GDP, demand, inflation, disposable income levels, unemployment rates, and government policies could impact price movements.

Of course, the best traders also know to account for international imports, exports, and deficits that affect price movements. 

The forex market tends to be range-bound, but trending markets also occasionally appear. You must rely on technical analysis to understand demand and supply in real-time. 

Understanding what the candlestick indicator describes and how it works is step number one to identifying winning trades. Analyzing market movements with price action is another reliable way to find profitable entry and exit points. 

As convenient as making money anytime, anywhere sounds, most beginners need hand-holding to figure out the ins and outs of making money in the forex market. 

And this is precisely what I’m offering in my comprehensive forex trading course.

I cover everything from the basics to my process and tools and the trading methodologies that have consistently made me money in this course. All of this is done LIVE, so you can ask as many questions as you need to get a head start. 

I haven’t even told you the best part yet:

Everything I cover in the course applies to other asset classes, including commodities and equities. 

To enroll, open a free Demat account here, and fill out your details here.

Frequently Asked Questions

Q1. Who is Eligible for Trading in Currency Future Markets in India?

Any Indian residing in the nation’s territory and any business, including banks and financial institutions, can legally do forex trading in India. But if you are a non-residential Indian or a foreign institutional investor, the government prohibits you from trading in the currency futures market.

Q2. Are Cross-currency Exchanges Allowed?

As mentioned earlier, SEBI allows the trading of specific cross-currency futures. You can partake in euro-dollar, dollar-yen, and pound-dollar exchanges legally.

Q3. What Does it Take to Become a Successful Forex Trader?

The most important quality you will need to build is discipline. You must commit to learning and take the time to read the market daily. The forex market allows all types of traders to make money, but remember to be patient and start small.

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