What is Forex trading?
Forex trading, also known as FX trading or Currency trading refers to buying and selling of international currency pairs. The main aim of forex trading is to exchange one currency with another in the expectation that the prices would alter, i.e. the currency bought shall appreciate by value with the one sold.
Forex market is the largest financial market globally, where the investors, speculators, and corporates are involved in cross-border Forex trade. Unlike other financial markets, the Forex markets do not operate through a physical location but via an electronic network of corporations, banks and individuals, trading one currency for another. This makes it convenient for forex markets to operate 24 hours round the clock across time zones and financial centres for 5-days a week.
How to make money on Forex
As forex markets are the most liquid markets with easy access round the clock, and low costs, many currency traders take a quick plunge into the market, but then exit even more quickly after experiencing setbacks. Here are a few pointers for investors/traders to keep up with the competition and on how to make money on Forex:
Learn the Basics of Forex Trading
Learning the basics of forex trading ranges from acquiring knowledge of the operative terminology to acclimatizing with the geo-political, economic factors affecting the trader’s chosen currencies. To master and make money on forex trading, being well-informed of the following operative terms is essential:
- Currency pairs: Currencies are always traded in pairs, such as JPY/INR, USD/GBP, etc. There are three type of currency pairs
- Major pairs that always involves USD (US Dollar) i.e., USD/EUR, USD/INR, etc.
- Minor pairs that do not involve USD but peg major currencies against each other i.e., JPY/EUR, EUR/GBP, INR/JPY, etc.
- Exotic pairs that include one major currency and one minor currency like USD/HKD (US Dollar/Hong Kong Dollar)
- PIP (Point in Price): A PIP is a difference in the valuations of the currency pair. For instance, if the USD/INR rate is 74.7001 today and was 74.7002 yesterday then the PIP is .0001.
- Base Currency and Quote Currency: The currency mentioned on the left side of ‘/’ in a currency pair is the base currency and the one on the right is called the counter or quote currency.
The base currency is always the reference element and has a value of 1 and it indicates the amount of quote currency required to buy a unit of the base currency. For instance, if you buy EUR/USD, it means you are buying the base currency while selling the quote currency.
In simple terms, a trader would BUY a pair, if he/she believes that the base currency shall appreciate relative to the quote currency. Contrarily, the trader would SELL if he/she believes the base currency shall depreciate with the quote currency.
- Bid and Ask Price: The price for buying base currency is Bid price and the price for selling base currency is the Ask Price.
For instance, if USD/INR is quoted as 75.7260/75.7240, then the Bid price to buy 1 USD would be Rs. 75.7240 and the Ask price to sell 1 USD is Rs. 75.7260.
- Spread: It is the difference between the Bid and Ask Price.
- Lots: Currency trading takes place in lots and three types of lot sizes are available based on the units – Micro (1K units), Mini (10K units), and Standard (1 lakh units).
In addition to these operative terms, researching and studying forex markets is always a work in progress and the traders need to be prepared to adapt to changing market scenarios, and world occurrences. Developing a robust trading plan to scrutinize and examine investment options based on the risk appetite, in line with investment objectives shall be a systematic way to make money through forex trading.
Find the Right Forex Broker
Ensure that the broker complies with the existing regulatory framework that preserves the integrity of forex markets. Chances are rife that investors fall prey to fraudsters claiming to be veterans in online forex trading, as past events indicate. There have been several instances where the traders wind down their operations once the transaction costs increase and the investor starts losing money. So, beware of such fraudsters who indulge in manipulative and abusive practices.
If you think you found a great brokerage or trading platform, be sure to check their reviews online and see if most people had a good experience with them. Also, be fully sure that the brokerage you opt for is offering you the currency pairs of your choice and the commission you would pay per trade is competitive enough.
Begin with a Demo/Practice Account
Most major trading platforms offer a practice platform so that you can try your hands at trading without spending your hard-earned money. It would be a good idea to take advantage of such a platform so that you don’t waste money while you are on a learning curve. During practice trading, you could learn from the mistakes so that you do not repeat them in real-time.
Start with Small Investments
When you step into real-time forex trading after enough practice, starting small would be a wise idea. Putting in a significant amount of money during your first trade might be a risky affair that could make you take impulsive decisions and result in losing money. Investing in small amounts at first and then gradually increasing the lot size over time would be beneficial.
Maintain a Record
Keep a journal that records your successful and unsuccessful trades for a future review. This way, you shall remember past lessons and avoid repeating mistakes.
Forex Trading in India
The Indian Forex market is regulated by SEBI and follows the ‘Forex Trading in India RBI Guidelines’. As per RBI’s Liberalised Remittance Scheme, an individual is not permitted to provide margin money for trading or use the money transferred abroad for speculative purposes. Forex trading in India is not allowed in cash for retail investors. In India, currency trading is facilitated on the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE) & the Metropolitan Stock Exchange of India Ltd.
Given these restrictions, Forex trading in India is quite small in comparison to those of developed markets. It is limited to only four currency pairs –Euro (EUR), US Dollar (USD), Great Britain Pound (GBP), and Japanese Yen (JPY), and an investor is allowed to trade between the four currency pairs by opening a trading account with a trusted SEBI registered broker or through SEBI authorised reputed platforms that engage in online forex trading.