You must be aware that export and import businesses involve exchange of foreign currencies, as in converting Indian rupees to the US dollar. So, how does it happen? And, can you, a common trader trade in currencies like you trade in stocks and increase profit margin? This article will provide answers to your questions.
But before we begin the discussion on how to trade in USD INR, let’s understand the foreign exchange market and how it is different.
Forex market isn’t like stock market. It is international with different trading spots across the world that allow you to trade not only in USD but also in EUR INR, JPY INR or GBP INR currency pairs. As an Indian trader, you can select any of these currency pairs for trading. These are currencies that have been benchmarked vis a-vis the Indian Rupee. EUR stands for Euro, JPY for the Japanese Yen and GBP for the Great Britain Pound. You can trade on exchanges such as BSE, NSE or MCX-SX. The USD INR pair is among the most popular in currency trading pair.
One of the first things you need to remember before you learn all about is that currency trading is done in pairs. As an Indian trader, you can take up USD INR trading, EUR INR, JPY INR or GBP INR.
Each pair has two currencies. One is the base currency, which is one unit and the other is quotation currency. Base/quotation is the value of the quotation currency, i.e., in the case of USD INR trading, USD is the base while INR is quotation and the value of one USD Is 75.76 INR.
So if you are a trader and you are buying a USD INR, you are expecting that the pair value will go up. When we mention the currency pair’s price, it is inclusive and bid and ask prices; that is the price at which you can buy and sell the pair.
What impacts currency pair prices?
Typically, any significant economic events. And, because two currencies, INR and USD, are involved, any major events on either front will cause movement in prices.
Another term you’ll often come across in connection with currency trading is ‘pip’. What does that mean? It is the very basic unit in foreign exchange trading. When references rates are stated by the Reserve Bank, the quote is till the 4th decimal point. Even the tiniest difference at this fourth point can make a huge difference in foreign reserves. All over the world, currency is quoted till the 4th decimal point. This is called PIP or point in percentage and is fixed at 0.0025 for USD INR. It is also called tick size. The lot size is usually fixed to USD 1,000. So, you can make Rs 2.5 per pip in USD INR (lot size x pip).
Trading USD INR in derivative market
How to trade in USD INR options in the derivatives market?
You can trade call and put options on the pair. There is no delivery of the dollar, and the difference exchange happens in INR. The trading is European style in nature. The option can be exercised upon expiry or squared off in the month. If the dollar gains strength against the rupee on or before expiry, then, the buyer of call option gains. A buyer of the put option gains on a weakening dollar and loses on a strengthened dollar.
So, what about USD INR trading in a futures contract? USD INR in a futures contract lets you buy or sell the dollar at a preset price for delivery on a date in the future. Futures are settled in cash in INR.
All forex trading has certain strategies or analyses that traders make use of to decide whether to buy or sell a currency pair. Typically, these trading strategies are based on world events, technical analysis, and historical trends, among others.
One of the popular strategies used by traders is price action strategy and depends on the bulls/bear of the price action.
Then, there’s trend trading, ie, when traders depend on trend analysis, wherein currency price movement is identified before deciding on an entry point.
There are also counter-trend trading, where traders go against the trend, range trading where a particular currency price range is used for trading, breakout trading where traders enter the market at the point when it is breaking out of an earlier range of trading. Position trading uses chart analysis and needs a trader to have deep knowledge and expertise. Carry trade involves selling currency that has a low rate of interest and buying currency which has a high rate of interest.
A new investor may find all these slightly overwhelming at the beginning. As mentioned before, forex trading would need some skills and knowledge of the market, along with an understanding of world events that could impact foreign currency prices, to be able to trade with confidence.