What is Forex?
In simple terms, Forex is foreign exchange i.e. it is the conversion of the currency of one country into the currency of another. It can also be referred to as FX or currency trading and is a decentralized international market where currency trading of the whole world happens.
The Currency of a country is valued as per the principles of supply and demand. There are some factors like tourism, trade, investment, etc. on which the value of a particular currency depends. For instance, when tourists visit our country they will need to pay for the goods. For this, they will exchange their currency for Indian rupees. This refers to the demand factor of our Indian currency. Similarly, there are trade requirements due to which one country will exchange and obtain the currency of another country. These factors pave a platform for foreign exchange and are major contributors to the foreign exchange market.
What is forex trading? Forex trading is defined as an activity of buying and selling currencies. Forex trading occurs through an online channel where currencies are traded 24X7 for 5 days a week. The global turnover of the forex market is approximated to be more than US$5 trillion and it is one of the world’s largest financial markets. It is the highest traded market in the world as people from all geographies participate in it.
Now, let us have a look at the forex trading basics. Since in forex trading, all transactions always involve the simultaneous buying and selling of currencies; they are known as currency pairs. In the currency pair, one is known as the base currency and the other one is called the quote currency. One of the famous global currency pairs is EUR/USD. In this currency pair, the base currency is EUR and it is either bought or sold in exchange for the quote currency i.e. USD in the given pair (In any currency pair first currency will be base currency and second will be quoting currency). The difference in the price between the currencies determines your profit or loss. It shows how much USD needs to be paid to buy 1 EUR.
There are some other famous currency pairs as well like the GBP/USD, USD/CHF, and AUD/USD, etc. These popularly used currency pairs of the world's currencies trade comprise a major percentage of the Forex market. So, these currency pairs are known as Majors. Some currency pairs do not include USD and are known as cross currency pairs like the GBP/JPY and JPY/CAD pairs. Furthermore, there is an exotic currency pair which is a combination of one major currency and the currency of an emerging economy like the USD/ZAR.
Since USD is the world’s most traded currency, most forex rates are mentioned against USD. Then comes EUR, Japanese Yen, GBP, CAD, etc. The Indian currency, INR is not yet fully convertible. It means, even though Indians can invest in forex and participate in other currency‘s trading and investment, there are a few restrictions when the amount is high and certain regulatory approvals need to be obtained. This is a regulatory requirement of the Government.
Once the Indian market matures further and proceeds towards a global economy, INR becoming a fully convertible currency is the only way ahead. However, the pace depends on India’s performance in terms of fiscal consolidation, reducing NPA, inflation control and robust financial infrastructure and increased efficiency in monitoring financial institutions and businesses.
To understand Forex Trading, certain terminologies are inevitable. They are:
Spread, Pips and Forex chart define the opportunities in forex
A spread is defined as the difference between the asking price and the bid price. In simple terms, a spread is the cost of trading.
Pip stands for a point-in-price and is defined as the measure of the changes occurring in the currency pair. It is used to measure the movements in prices and currency pair changes. We can also refer to Pip as a percentage in point or price interest point.
In a forex transaction, there are mainly 3 types of charts i.e. Candlestick Chart, Bar Chart, and Line Chart. A candlestick chart is most popular among traders because of the wide range of information displayed on it. The high, low, opening and closing prices of the currencies are all well portrayed by a candlestick chart. It has 3 major points i.e. open, close and the wicks. The wicks will depict the high to low region of currency prices.
A bar chart represents the opening, closing, high and low points of the currency prices. A bar chart is mostly used by forex traders to find out about the contraction and expansion of the price ranges. Furthermore, a line chart is usually depicted from one closing price to the next closing price and is quite helpful for beginners in forex trading.
Two more important terms related to forex trading basics are Long position and Short position. When a trader purchases a currency with an expectation of the value to increase, it is said as a long position and when a trader sells a currency by expecting its value to decrease in the future, it is known as a short position.
Exchange rate and its changes
The major concept while making a trade in foreign currencies is the exchange rates. The exchange rates for currencies keep on changing continuously and a forex trader will attempt to earn profit from these changes.
With precise knowledge of what is forex trading and forex trading basics, we can now learn about how it works? Suppose, you have been on a trip to Europe in July 2019 and you buy EUR 5000. To do so, if you had bought EUR in May, you would have got better exchange rate than in June, since the EUR/INR rate has gone up from 77.70 to 78.6 in the last 1 month or so. So, the cost of buying 5000 EUR would have risen by a few thousand INR.
For example, the EUR/INR rate before the trip was 78.2. So, to buy 5000 EUR, you would have had to spend INR 3,91,000 and for 1000 EUR, your amount spent was INR 78,200.
Now, say after the trip, you wish to change the remaining amount of 1000 EUR back to INR and the rate has gone up from 78.2 to 78.7, then the amount you would receive is INR 78,700.
Thus, this profit of INR 500 (78,700-78,200) is the profit from forex.
With the onset of modern technology in all fields, you can easily practice currency trading by online forex trading. Due to online forex trading, you do not have to commute or leave your place to get involved in forex trading. You can sit at your home, invest in the prices of different currencies and earn profits. Online forex trading has made this forex trading process even more simple and convenient.
How to start a Forex transaction?
Let us have a look at the process to start Forex trading.
o Selection of currency pair
In the first step, you need to select the currency pair which you want to trade and the initial amount which you are interested to invest.
o Select your deal size
The size of your deal can be expanded up to 400 times by using leverage.
o Selection of direction
Suppose, you are planning to make trading of foreign currencies, then you will be able to make a profit even when the prices of currencies go down. So, it is important that you select your direction wisely.
o Close your deal and profit collection
Suppose the price of the currency pair EUR/USD rose up. Then at that point, you can decide to close your deal and get the profit.
Forex Trading in India
It is legal to carry out Forex trading in India, but it should be practiced strictly through the forex trading platform. In simple terms, you can only carry out a forex transaction through registered forex brokers in India. There is a prohibition on the forex trade between any two foreign currencies in India. Citizens of India cannot send funds overseas to forex brokers by any direct or indirect means. All this is because of the regulatory norms of India, as already stated before.
To carry out forex trading in India, you should know that the regulatory bodies for forex trading in India are the Reserve Bank of India (RBI) and the Securities Exchange Board of India (SEBI). As a first step, you need to open an FX or currency trading account with a forex broker who is registered with SEBI. There can be two types of accounts viz. The Personal Account and The Business or Corporate Account. After the creation of the account, the trader can trade on different currency derivatives.
Backed by research, experts from IndiaNivesh are well versed with foreign laws, procedural know how of forex trading in India & key currency movements. Our team can help you to make the right investment decisions for a profitable and legal forex trading in India.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.