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What is Forex Trading?

•6 min read•by Angel One
Forex trading is buying and selling global currencies to profit from price changes. Learn how it works, key strategies, and legal INR pair trading in India via SEBI-regulated platforms.
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What is Forex Trading? 

Summary: Forex trading involves buying and selling currency pairs to profit from exchange rate movements, making it one of the most active global markets. 

Forex trading goes beyond casual currency exchange. It involves trading in currencies of different countries with the aim of making a profit from price changes. As one of the largest financial markets in the world, it operates 5 days a week and sees trillions of dollars traded daily. 

This article will help you understand what forex trading is, how it works, key forex trading terms, and why it has become a popular option for investors and traders around the globe. 

Key Takeaways 

  • Forex is the world’s biggest and most liquid financial market, running 24 hours a day for 5 days. 

  • Each forex transaction consists of the simultaneous purchase of one currency against another. 

  • Forex provides the advantage of leverage, low cost, and a variety of strategies. 

  • In India, trading of forex is limited only to the SEBI/RBI-accredited platforms, and specifically for INR currency pairs. 

Forex Trading Meaning 

Forex trading is also known as foreign exchange trading. It involves exchanging one country's currency for another, such as trading Indian rupees for US dollars. This is done by individuals, businesses, banks, and even governments for various reasons, including international trade and investment. 

Most currency trading, however, is done to earn profits. Since exchange rates keep changing based on market conditions, traders try to take advantage of these fluctuations. For example, if the value of the US dollar rises compared to the Indian rupee, a trader who bought dollars earlier can sell them at a higher price and make a profit. 

How Does Forex Trading Work?

Forex trading involves buying and selling the currency of one country for another with the aim of making a profit from fluctuating exchange rates. Currencies are traded in pairs, such as USD/INR or EUR/USD. When a trader believes one currency will strengthen against another, they buy that pair. For instance, buying EUR/USD means the trader expects the euro to rise in value compared to the US dollar. If this happens, the pair can be sold later at a profit. 

The foreign exchange market runs 24 hours a day, 5 days a week, across key global financial centres like London, New York, Tokyo, and Sydney. In India, the forex market runs from 9 AM to 5 PM. This constant operation allows traders to react instantly to market news, economic data, and geopolitical events. 

Also, check out USD INR Trading here. 

Key Elements of Forex Trading 

  • Currency pair exchange: Forex trading always happens in pairs, such as USD/INR or EUR/USD, where one currency is bought and the other is sold. Each exchange rate reflects how much one currency is worth relative to the other. 
     

  • Online trading platforms: Forex transactions are carried out entirely online through trading platforms provided by brokers. These platforms provide live prices, order execution, charts, and analytics, enabling access from anywhere.  

  • Price-driven trading: Traders participate to benefit from movements in currency values. When one currency strengthens or weakens against another, they buy the base currency and sell the quote currency to capture price differences.  

  • Market activity: The forex market is open for trading all day and night for five days a week, due to the different time zones of the financial centres situated on different continents.   

  • Leverage and margin: Brokers offer leverage that allows traders to control larger positions with limited capital, increasing both profit potential and risk.  

  • Risk management tools: Stop-loss and take-profit orders help limit losses and secure gains. The market operates across global time zones, allowing traders to react to events in real time. 

Who Trades in the Forex Markets?

The worldwide forex market, along with India’s currency derivatives segment, has several players.  

  • Commercial banks: Commercial banks support their clients, manage currency risk, and make a profit from trading currencies.  

  • Central banks: Governments and central banks trade in the currency market to manage monetary policy, keep their currency stable. 

  • Corporations: Businesses involved in cross-border payments, such as importers and exporters, use the forex market to hedge against currency swings or convert their foreign income and expenses. 

  •  Retail traders/individuals: In countries like India, individual investors also trade currency pairs (via authorised brokers) to speculate on exchange-rate movements. 

  • Hedge funds and investment managers: These institutional participants execute large currency trades as part of their portfolio strategies. They aim to benefit from exchange-rate movements, manage global exposures, and optimise returns for their clients. 

Pros and Cons of Forex Trading 

Pros 

Cons 

Traded on SEBI-regulated exchanges (NSE, BSE). This ensures high transparency, no broker fraud (if SEBI-registered), and a proper grievance redressal system. 

You are restricted only to pairs that include the Indian Rupee (INR), such as USD/INR, EUR/INR, GBP/INR, and JPY/INR. You cannot legally trade major global pairs like EUR/USD or AUD/NZD. 

It allows you to control a considerable contract value with a very small amount of margin. This can significantly amplify potential profits from small price movements. 

Leverage is a double-edged sword. The exact mechanism that amplifies profits will also amplify losses, and a small adverse move can wipe out your trading capital quickly. 

Brokerage, exchange fees, and taxes (such as STT) on currency derivatives are typically much lower than those for equity or commodity trading. 

Unlike the 24/5 global market, the Indian currency market is restricted to exchange trading hours (e.g., 9:00 AM to 5:00 PM, Monday to Friday). 

It is an accessible and effective tool for businesses (importers/exporters) and investors with foreign assets to protect themselves against adverse currency fluctuations. 

Currency markets are extremely sensitive to global news, central bank announcements (from the RBI, US Federal Reserve, etc.), and geopolitical events, which can cause sudden and sharp price swings. 

How to Trade in Forex from India? 

Forex trading in India is governed by the regulations of SEBI and RBI. Below is a simple guide that shares the steps: 

  1. Choose the currency pairs: Trade only INR pairs like USD/INR, EUR/INR, GBP/INR, and JPY/INR with brokers recognised by SEBI and comply with the rules of RBI. 

  1. Open an account with a recognised broker:  Register with a broker and then proceed with the KYC and paperwork, and finally activate the currency derivatives segment. 

  1. Understand margins, leverage & trading hours thoroughly:  The lowest margin could range from 2.5% to 5%. The trading hours are aligned to the hours of the corresponding exchange, usually from 9 AM to 5 PM. Keep in mind that high leverage can lead to the same magnitude of both profit and loss. 

  1. Develop your strategy and control risk 
    Determine the maximum risk the investor is willing to take, employ stop-loss orders, and trade only the pairs with which they are familiar. The liquidity in the derivatives of forex trading in India might not be consistent. 

  1. Compliance is key, and staying informed is smart 
    Only trade through authorised brokers, be aware of the taxes, and keep an eye on the RBI announcements and global events that may impact currency prices. 

Steps to Begin Forex Trading in India 

Below is a clear and complete understanding of how Indian traders can legally access the foreign exchange market in India through the currency derivatives segment, along with the key steps, rules, and safeguards involved. 

  • Open trading and demat account: Choose an SEBI-approved broker, complete KYC with PAN, Aadhaar, and address proof, and confirm the broker supports currency derivatives. 

  • Activate the currency derivatives segment: Enable the currency or F&O segment. Some brokers may request income proof or extra activation forms. 

  • Fund your account: Add margin money. INR pair margins usually range from 2.5–5%. Lower margin means higher leverage and higher risk. 

  • Select eligible currency pairs: Trade only the permitted INR pairs such as USD/INR, EUR/INR, GBP/INR, and JPY/INR. Avoid offshore spot forex platforms. 

  • Learn the platform and place orders: Understand how to pick a contract, buy or sell, check lot size, price, and expiry. Practice before trading. 

  • Manage risk effectively: Use stop losses, keep position sizes under control, and monitor global developments and RBI updates. 

  • Close or settle positions: Exit trades before expiry or allow them to settle. Know settlement rules, expiry dates, and tax responsibilities. 

Also, learn How to Trade Currency here. 

Forex Trading Terms to Know 

Term 

Definition 

Currency Pair 

A price quote showing the exchange rate between two different currencies. 

Base Currency 

The first currency listed in a currency pair. It is the currency being bought or sold. 

Quote Currency 

The second currency in the pair, used to value the base currency. 

Bid-Ask Spread 

The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller will accept (ask). 

Pip 

The smallest price movement in a currency pair, used to measure price changes. 

Lot 

A standard trading unit in forex, usually equal to 1000 units of the base currency. 

Leverage 

A tool that lets traders control larger positions using a smaller amount of actual capital. 

Margin 

The minimum amount of money required to open and maintain a leveraged trading position. 

Explore forex trading strategies with examples to gain better insights and improve your forex trading decisions. 

Also, learn What is Currency Appreciation here. 

Risks of Forex Trading 

Forex trading is a risky venture, but the risks are just as significant as the possible rewards. The main forex trading risks are: 

  1. Leverage risk 

 The ability to control huge positions with a small amount of money can lead to a rapid loss of the whole investment or even more than that. 

  1. Interest rate and country risk 

 Changes in government policies, interest rates, and wars or other conflicts can lead to very quick and significant changes in the value of currencies like INR. 

  1. Transaction or settlement risk 

 The difference in the exchange rates may increase between the time of placing an order and that of settling it, especially in a fast-moving market. 

Also, check out What is Forex options here. 

Conclusion

Forex trading can be a powerful way to earn from global currency movements. With 24x5 market access, high liquidity, and flexible trading options, it suits both new and experienced traders. But it also demands knowledge, discipline, and careful risk management. 

In India, trade only through SEBI-registered platforms to stay compliant and safe. It is important to have a reliable broker in order to start forex investing who can give you informed guidance.

FAQs

Forex (foreign exchange) trading involves buying and selling currencies in the market around the world. It works by traders buying one currency with another currency in the hope of making a profit as the exchange rate between the two currencies changes over time.
Yes, forex trading is legal in India, but it is subject to certain regulations and restrictions. Indian residents are allowed to trade in currency pairs that include the Indian Rupee (INR), but they are not allowed to trade in any other currency pairs like USD/EUR, GBP/USD, etc.
Angel One, Fusion Markets, Capital.com, Tickmill, and CMC Market are a few of the best forex trading platforms in India.
Some common risks of forex trading include: Currency volatility Political and economic instability Regulatory risks High leverage and margin trading Lack of transparency in pricing and execution Cybersecurity risks Fraudulent activities by brokers and dealers Limited legal protections for traders
Forex trading can be a potentially profitable but also risky venture, and it requires some knowledge and skills to get started. Here are some steps you can take to begin your forex trading journey: Educate yourself on the basics. Choose a reputable forex broker like Angel One and open a demo account with the same to practice trading. Research and develop a trading strategy that fits your investment goals and test it on your demo account. Start with a small amount of capital and trade. Keep learning and adapting your trading strategy as you gain experience.
Here are the basic steps to start trading currency in India: Open a trading account with Angel One Learn about the basics of currency trading, including the different currency pairs and how to read charts and indicators Start with a demo account to practice trading without risking real money Decide on a trading strategy and set a risk management plan Choose a currency pair to trade and start monitoring its performance Place your trades and track them regularly

Forex market traders use charting software for technical analysis, economic calendars for data updates, and risk tools like stop-loss and limit orders. 

In the forex market, the spread is the gap between bid and ask prices, reflecting broker costs and liquidity. Lower spreads reduce trading costs, which especially benefits active traders.

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