What is forex trading and how to do forex trading in India?

Looking for an answer to what is currency trading in India? Or confused about how to do Forex trading legally in India? Well, Forex is the largest decentralized global market where every currency in the world is traded.

Currency trading in India is the most liquid market in the world, however, the legal status of forex trading in India is still a big question and the majority does not know the answer. So, here we are going to give you an insight on Forex trading in India through our blog.

Forex (FX), also known as forex or currency trading, is a global market, decentralized in nature, where all currencies of different economies are traded – sold and bought.

The Forex market is the largest and most liquid market in the world. With an average daily trading volume of $5 trillion, the global stock market doesn’t even come close to it. Simply put, forex trading is the act of buying and selling currencies and if you have ever traveled abroad, you have made forex transactions. 

For example, on your trip to France, you converted your rupee (INC) into euros and when you did, the foreign currency exchange rate between the two currencies, based on the supply and demand at the time, changed your rupee. determines the number of euros you will receive.

In addition, the exchange rate is highly liquid and fluctuates constantly, which requires lucrative skills and a broad insight into a market-based trading system to understand.

What is Forex in Hindi & What is Forex?

Like stocks, you can buy or sell a currency based on its value or simply by strategizing where its value is going. It is legally allowed to trade forex within Indian exchanges like BSE, NSE, MCX-SX. However, you can win a large amount or lose it easily.

If you think that the value of a currency will increase or decrease, you can buy or sell it accordingly. With this high market flexibility, finding buyers when you are selling and vice versa is much easier than in any other market place.

What is

Forex Trading

?

Forex trading occurs when the buying and selling of one currency for another occurs as part of the same transaction and obviously at the same time. The two currencies involved in the transaction form a currency pair, where each is represented by three letters – the first two letters representing the name of the country, and the third letter representing the name of the currency.

For example –

  • Indian Rupees: INR
  • United States Dollar: USD
  • Eastern Caribbean Dollar: ECD
  • Australian Dollar:
  • AUD, Japanese Yen: JPY

As mentioned earlier, the forex market is decentralized, highly liquid and global and the participants in the forex market include central banks, commercial banks, brokers, etc. Forex departments of major banks are connected on a 24-hour schedule on a global basis.

The major commercial centers of forex are in London, Amsterdam, Frankfurt, Milan, Paris, New York, Toronto, Bahrain, Tokyo, Hong Kong and Singapore. The central banks (RBI for India) monitor the market movements and are bound to intervene, if necessary, as per the policies of the government.

What is meant by forex trading?

In its simplest form, forex trading is similar to a currency exchange you might do while traveling abroad: a trader buys one currency and sells another, and the exchange rate fluctuates continuously based on supply and demand. .

Currencies are traded in the forex market, a global market that is open 24 hours a day from Monday to Friday. All forex trading is conducted over the counter (OTC), meaning there is no physical exchange (as is the case for stocks) and a global network of banks and other financial institutions oversees the market (the New York Stock Exchange). e.g. instead of central exchange) )

A large proportion of forex market trading activity occurs among institutional traders, such as those who work for banks, fund managers and multinational corporations. These merchants do not necessarily intend to take physical possession of the currencies themselves; They are merely speculating or hedging about future exchange rate fluctuations. 

For example, a forex trader can buy the dollar (and sell the euro) if it thinks that the dollar will strengthen in value and therefore will be able to buy more euros in the future. Meanwhile, a US company with European operations may use the foreign exchange market as a hedge in case the euro weakens, meaning the value of their earnings there falls.

What is Currency Trading?

Currency trading, often referred to as foreign exchange or forex, is the buying and selling of currencies purely for the purpose of making profits. It is also called ‘Speculative Forex Trading.

To conclude, ‘currency trading’ and ‘foreign exchange’ are synonymous in the usual sense, but the former is done with the intention of making a profit from the transaction.

For example, let’s say you want to take advantage of a rising dollar price. The dollar is trading at Rs 64, you think the price is going to rise and expect to reach Rs 67 in few months, you can enter long position by buying a USDINR contract on the exchange. If the price goes up to Rs.67, you get a profit of Rs.3 per dollar. So in a single contract of 1000 $ you can earn 3000 rupees.

How are currencies traded?

All currencies are assigned a three-letter code similar to the ticker symbol of a stock. While there are over 170 currencies around the world, the U.S. The dollar is involved in the vast majority of forex trading, so knowing its code is especially helpful: USD. The second most popular currency in the foreign exchange market is the Euro, the currency accepted in 19 countries in the European Union (code: EUR).

The other major currencies, in order of popularity, are: the Japanese yen (JPY), the British pound (GBP), the Australian dollar (AUD), the Canadian dollar (CAD), the Swiss franc (CHF), and the New Zealand dollar (NZD).

All forex trading is expressed as a combination of the exchange of two currencies. The following seven currency pairs – known as majors – account for approximately 75% of trading in the forex market:

  • EUR/USD
  • GBP/USD
  • USD/JPY
  • AUD/USD
  • USD/CHF
  • USD/CAD
  • NZD/USD

Why do we have Exchange Traded Currency Derivatives?

An exchange-traded derivative is a financial contract that is listed and traded on a regulated exchange. Simply put, these are derivatives that are traded in a regulated manner.

Exchange-traded currency derivatives derive their value from an underlying asset that is listed on a trading exchange. It is also guaranteed against any default through a clearinghouse making it a safe medium. 

Due to their presence on a trading exchange, ETDs differ from over-the-counter (OTC) derivatives in terms of their highly standardized nature, high liquidity, and ability to be traded in the secondary market.

 It should be noted the fact that ETDs also include futures contracts and options contracts, that is, exchange-traded currency derivatives (ETDs) to exchange one currency for another at a future date. One can use currency futures contracts.

In India, such derivatives contracts are used to hedge against high value currencies such as the dollar, euro, pound and yen. Used mostly by corporations with significant exposure to imports or exports, these contracts hedge against their exposure to a certain currency.

Is Forex Trading Legal in India?

It is an established fact that no Indian citizen, as directed by SEBI and regulated by RBI, so as to minimize the risk involved, shall, under any circumstances, through any electronic or online forex trading platform Cannot trade forex inside Indian territory. 

Based on the RBI circular issued in 2013, forex trading through electronic or internet trading portals has been prohibited. However, forex trading is considered legal when one does it through specified forex trading platforms and the base currency is INR (Indian Rupee).

Simply put, the Indian government has limited trading for Indian residents to trade only currency pairs that are benchmarked against the INR (Indian Rupee).

As an Indian resident, as long as you are trading through any specified Indian brokerage that allows access to exchanges such as NSE, BSE and MCX-SX in India and provides access to currency derivatives, Transactions made for business are considered completely legal.

Prior to this, the only tradable instruments were the EURINR, GBPINR, JPYINR, and USDINR. However, the Reserve Bank of India further allowed, since 10 December 2015, exchanges to offer cross-currency futures contracts and exchange-traded currency options in three more currency pairs, EUR-USD, GBP-USD, and USD-JPY. Gave.

At this juncture, it should be duly noted that under the Foreign Exchange Management Act (FEMA), 1999 or the FEMA Act, forex trading illegally carried out in India may attract imprisonment or fine. However, it may be noted the fact that there are no restrictions on foreign exchange trading in India for NRIs.

How does forex trading work?

Unlike stocks or commodities, forex trading does not take place in the form of exchanges but in a direct way between two parties, obviously, in an over-the-counter (OTC) market. The said OTC market is divided into three different types, the spot, forward and future forex markets. 

Forex trading involves selling one currency to buy another, which is why it is quoted in pairs. In simple words, a forex pair is worth one unit of the “base” currency in relation to the “quote” currency. Each currency in the pair is listed as a three-letter code – two letters for the region and one for the currency.

For example, GBP/USD is a currency pair that involves buying the Great British Pound and selling the US Dollar, which explains the prefix ‘P’ for the pound and ‘D’ for the dollar.

In addition, currency pairs can be grouped into the following categories:

  1. Major pairs – High turnover. Calculation of seven (07) currencies that make up 80% of global forex trading – EUR/USD, USD/JPY, GBP/USD and USD/CHF
  2. Minor pairs – are traded less frequently. Often, these pit major currencies against each other instead of the US dollar – EUR/GBP, EUR/CHF, GBP/JPY
  3. Exotics – A major currency from a small or emerging economy – USD/PLN, GBP/MXN, EUR/CZK
  4. Regional pairs – Pairs classified by region – EUR/NOK, AUD/NZD, AUD/SGD.

There are many ways in which a person can trade forex by buying one currency together and selling another in a single transaction. Traditionally and for a long time, forex trading transactions are usually done through a forex broker. 

But with the growing popularity of online trading, the benefits of using CFDs (leveraged products, which enable a trader to open a position for only a fraction of the full value of both individual or institutional) can be eased by using forex volatility. can be employed.

Unlike non-leveraged products, one does not own the asset, but takes a position on the proposition that “the market will rise or fall in value”, a process more or less like predicting the outcome of a given set of available data. of factual metrics based on

Although leveraged products can increase profits, they can also increase losses if the market moves against you, which is why CFD trading is illegal in India.

What are the Strategies for Forex Trading in India?

Given its liquidity in terms of daily trading volume, losing money is actually easier than making it. Following are some of the strategies commonly employed for the cause –

  • Price Action Strategy – Price action strategy is the most commonly employed strategy for forex trading. It completely depends on the bull or bear of the price action in forex trading and is generally useful in all types of market conditions.
  • Trend Trading – In this type of strategy, traders need to identify currency price movements (whether up or down) based on which they need to decide on their entry point.
  • Counter Trend Trading – In this strategy, a trade is made against the current trend with the pure hope of making small profits and it is based on the prediction that the trend will reverse.
  • Range Trading – In a range trading strategy, trading is done in a specific range of currency prices and there is a need to identify favorable price conditions in which they can be traded where price levels usually depend on the demand and supply of currencies. There are.
  • Breakout Trading – In this type of trading, a trader enters the market at the point when the market is breaking out of the previous trading range, i.e. breakout.
  • Position Trading – Position trading is mostly used by experienced traders and involves analyzing the charts at the end of the day. Mastering this strategy requires a strong grasp of market fundamentals.
  • Carry Trade – The focus in the carry trade strategy is on the interest rate difference between the two countries whose currency is being traded. This involves selling a currency that has a lower interest rate and buying a currency that has a higher rate of interest and is therefore considered a successful strategy when executed properly.

Who is eligible to trade in the currency futures market in India?

Any Indian resident in the territory of the country, or a company including banks and other financial institutions, can participate in the futures market. However, Foreign Institutional Investors (FIIs) and Non-Resident Indians (NRIs) are prohibited from participating in the currency futures market.

What are cross currency exchanges?

As mentioned earlier, the Securities and Exchange Board of India (SEBI) has launched cross-currency futures. Options are now opened in Euro-Dollar, Pound-Dollar and Dollar-Yen (EUR-USD, GBP-USD, and USD-JPY).

Indian forex market

The forex market in India came into existence in late 1978 when banks were allowed to trade in currencies by RBI. The Indian Forex market as it exists today is well structured and operated in an RBI-regulated fashion. Dealers authorized by RBI may engage in such transactions. The forex market in India is made up of “spot and forward” markets. 

The forward market is active in the Indian region for a maximum period of six months. In recent years, the maturity profile of the futures market has lengthened, largely thanks to RBI initiatives.

The link between forwarding premium and interest rate differential seems to work largely through leads and lags and it can be seen that foreign markets are also affected by importers and exporters through credit grants to foreign markets. .

Time zones for forex trading

To summarize the time-zone segmentation of the forex market as the forex market, the following chart may be referred to:

forex trading centers in the world Trading hours in local time
Forex Oceania – Asia Session
Wellington, New Zealand 08: 00-17: 00
Sydney, Australia 08: 00-17: 00
Tokyo, Japan 08: 00-17: 00
Hong Kong, China 09: 00-17: 00
Shanghai, China 09: 00-17: 00
singapore, singapore 09: 00-17: 00
India 09: 00-17: 00
Moscow, Russia 09: 30-19: 00
Forex – Europe Session
Frankfurt, Germany 07: 00-15: 00
Zurich, Switzerland 09: 00-17: 30
Paris, France 09: 00-17: 30
London, United Kingdom 08: 00-16: 00
Johannesburg, South Africa 09: 00-17: 00
Forex – America Session
New York, United States 08: 00-17: 00
Toronto Canada 08: 00-17: 00
Chicago, United States 08: 00-16: 00

Even though the 24-hour market offers substantial benefits for many individual and institutional traders, it is not deprived of some disadvantages. One of which is discussed is that it is highly laborious and almost impossible for any trader to monitor a position for so long, which means there will certainly be trading times when opportunities are missed.

Worse still, when market volatility triggers the spot to move against a set position. To minimize such risk, a trader must be alert and clearly aware of when the market is most volatile, and decide which times are best for his/her trading pattern. It’s good.

One of the biggest features, or rather benefits, of forex trading is that it is open 24 hours a day allowing investors to trade during normal trading hours or even after work. You can trade at night too!

However, not all time-zones can be treated equally as there are times when price action is consistently volatile, and when it is completely muted. It can be concluded as a key observation that the major trading sessions in Forex are directly linked with market hours.

Which currency pairs can be traded in India?

As mentioned earlier, only the following currency pairs can be traded in India –

  • rupee dollar
  • rupee-pound
  • Rupee-yen
  • rupee-euro
  • Euro Dollar
  • pound-dollar
  • yen-dollar

Forex trading – Faq

Is Forex trading profitable in India?

Being a market with high liquidity, the chances of making profit are as low as incurring losses not only in India but anywhere in the world. With the right skill set and command over the fundamentals, one needs to learn all the tricks of this trade.

Where can I trade forex in India?

You can trade forex legally within Indian exchanges like BSE, NSE and MCX-SX.

Is Forex Trading Just Gambling?

Gambling is where you essentially and obviously rely on pure luck! According to this standard, forex trading cannot be considered gambling. It is a highly risk-based process, where a trader tries to make a profit by predicting the movement of the market.

What if I want to trade the FX markets with international brokers?

It is illegal to trade the FX markets with international brokers.

What is the punishment for forex trading in India?

Section 13 of FEMA states that contravention of the Act may result in punishment as well as imprisonment under the Act.

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