Forex trading, also known as currency trading, has grown very rapidly in the field of trading in the last few years. This has emerged as a new opportunity for investors to earn money. Therefore, if you also want to try hand in forex trading then first understand its basic information.
In this article, we have explained in detail its benefits and risks related to forex trading. Let us first understand the basis of forex trading.
- It is the most exciting form of trading, only institutions and banks invest in it on a large scale, but it is also suitable for retail investors.
- Many traders trade in stocks, equities, commodities, derivatives, options, futures and many other forms. Each type of trading requires a specific set of expertise and skill levels. They all have advantages and drawbacks.
- A trader must understand his trading objectives, risks and personal goals so that various forms of trading can be judged correctly before entering the market.
- One of the most difficult and interesting forms of trading is forex trading. Forex trading basically means buying and selling of forex or currency.
- It is one of the largest financial markets in the world, with more than $ 5 trillion traded in Forex daily.
- Earlier, in currency trading all the work was done physically. But now with the advent of technology, every small and big information related to forex and currency is easily available to traders.
- The main thing is that the information related to forex trading is done all over the world, it is easily accessible in the whole world.
- It is clear from this that the purpose of buying and selling forex currency may vary from person to person. For example, a corporate can trade currency to prevent its order related risks, while a passenger can buy currency for his travel expenses.
- Similarly, a trader may trade in currency to gain from price fluctuations.
- So whatever the trader’s purpose is, forex trading is in high volume and around the world round the clock.
Currency Trading in India
- In recent times, currency trading in India has started happening rapidly. It is a new investment tool, yet profitable. However, there are some restrictions on currency trading in India.
- First of all, it allows to trade only in those currencies. These are benchmarks against INR and traders cannot trade in forex currency from India. Therefore in forex trading, you can only trade in USD / INR, EUR / INR, GBP / INR and JPY / INR pairs.
- Currency trading in India takes place on the Multi Commodity Exchange (MCX) and the National Stock Exchange (NSE).
- Therefore only Indian residents and companies are allowed to trade currency futures in India and NRIs and foreign institutional investors are not allowed to trade in the currency future market.
- Currency trading in India is regulated by RBI and SEBI as currency trade affects the entire economy of a country.
- This is because when an Indian trader loses money in currency trading, it means the country is benefiting from outside traders.
- In the event of loss in currency trading, traders actually buy more forex currency which increases the loss of current account of the country.
How to Trade Forex
- The most important aspect to understand about forex trading in hindi is that it is traded in pairs.
- There are two types of currency. One is the base currency, which is always fixed with 1 unit of currency and the other is the quotation currency which is equal to the base currency.
- Base currency / quotation currency leads to a value which is the value of quotation currency as against the base currency.
- Base currency / quotation currency = value
- Similarly, there are many currency pairs that are actively traded all over the world and this is the movement of the value of the currency pair which acts as a trigger for currency trading.
- Now, it is very important to recognise the difference between stock trading, or any other form of trading, and currency trading.
- While trading stocks, the trader should have either a bullish or a beer trade estimate. In the case of forex trading, the trader should have a double trading estimate.
- Therefore, the trader should have a double estimate of the uptrend on the base currency and the slowdown on the quotation currency.
- Also, when talking about currency pair, it includes both bid and ask price. This means the price at which the pair can be bought and the price at which it can be sold.
- Price fluctuations in forex currency are represented by pips, which are the percentage in point. Its price is shown at the fourth decimal point and the change to the fourth decimal point is called 1 pips, which is equal to 1 / 100th of 1%.
- It is said that trading occurs due to change in prices. The price of a currency pair is influenced by the global economy and many other factors.
- Furthermore, because the currency is traded in pairs, it is difficult to identify an exact effect on the price of the pair because it involves two currencies.
Benefits of Forex Trading
Currency trading is quite risky and volatile, however, it offers many advantages over other modes of trading and overall. Some of the distinct advantages of currency trading are:
- 24-hour trading: Forex trading is done all over the world and all the time there is a market in the world. Therefore, currency trading can occur 24 hours a day at the currency trading exchange.
- Betting: Using betting in currency trading is a great strategy. Traders can make estimates based on world events and can earn profits based on them.
- Hedging: Forex trading is mainly used as a hedging technique by importers and exporters.
- Arbitrage: Most currency is traded on most exchanges around the world.
- Currency trading provides ample arbitrage opportunities to traders who can buy currency on one exchange and sell it to another, making a profit in the process.
- Leverage: Currency trading provides the benefit of leverage. The trader can trade more money in the market.
Forex Trading Risk
- Like all other forms of trading, forex currency trading also has many risks. It is a very volatile market and can be very difficult for informal investors and traders.
- The biggest risk is that the market is affected by news and events. But the actual impact of that news or event is not known because the currency is traded in pairs.
- A single event can positively affect both pair’s currency and thus the whole effect on the pair cannot be inferred. Therefore, it is recommended that currency traders practice risk management.
- They should start the trade using their practice account only after getting all the information and knowledge. The trader should take the risk only on the basis of his risk appetite and not on the basis of leverage as leverage can increase the risks.
- Risks should be minimised by trading in different markets and greater emphasis should be placed on the use of stop-loss techniques.
- In conclusion, currency trading is very beneficial but it is nonetheless very risky. Traders must make careful decisions themselves to assess risks and risk-taking capabilities.
- The trader should use this effective strategy to ensure that the trade is in accordance with it and he has to bear the least risk.
- Once you know about currency trading and want to open an account, you can open a currency trading account.
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Founder & CEO| Fox Investor & A.V.A. Taxway Associates- Corporate & Tax Law Firm
Viibhor Agarwal is a Business & Brand Consultant as well as he is a Financial Expert his area of specialization is to guide Entrepreneur, Start-up’s and SME’s to build the brand value of business financially & legally. He has 8 year extensive experience in this sector