Understanding Currency Trading in India

Table of Contents

1. Introduction
2. Risks in Currency Trading
3. Rewards in Currency Trading

1. Introduction

Trading in forex and related derivatives takes place over-the-counter as well as on exchanges. Over the globe, foreign exchange market is the largest financial market, larger than equity or debt market. Participants in the currency derivatives market are majorly institutions including banks, investment management firms, hedge funds, retail forex brokers, etc. Awareness of the currency trading is gradually increasing among small traders.

There are two ways in which one can trade in currencies – Currency Futures and Currency Options.

Currency futures are traded on platforms offered by exchanges like the National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and Metropolitan Stock Exchange (MSE). Currently, currency trading is open between 9.00 am to 5.00 pm.

Currency derivatives are available on four currency pairs viz. US Dollars (USD), Euro (EUR), Great Britain Pound (GBP) and Japanese Yen (JPY). Cross Currency Futures & Options contracts on EUR-USD, GBP-USD and USD-JPY are also available for trading in Currency Derivatives segment.

2. Risks in Currency Trading

Major variables which pose risk to a trader in currency trading are as follows:

1. Interest Rate Risk – Generally, when a country raises its interest rates, the country’s currency strengthens in relation to other currencies as assets are shifted away from it to gain a higher return elsewhere.
2. Leverage Risk – Leverage is considered as two-edged sword. The more one can gain in a profitable situation, the more possibiity of losing heavily in an unfavourable trade. So, one should keep his/her position sizing low so that the loss can be minimised.
3. Inflation Risk – If inflation is rising in any country, then its Federal Reserve Bank will be forced to suck excess liquidity from the markets by increasing interest rates; thereby strengthening its currency.
4. Geo-political Situation – One of the major variables to influence any currency is the political situation and strength of its country. If the economy is struggling, then it will depreciate its currency against other world currencies.

3. Rewards in Currency Trading

Some major rewards in entering into currency trading in India are:

1. Lower Margin Requirements: Unlike equity markets, currency tradingallows one to buy and sell on margin provided by brokers and thereby enables to earn a decent return on total capital.
2. High Liquidity: One can take scaling positions in which he/she can open and liquidate a position within minutes or seconds of each other.
3. Hedging: One can take hedging positions against investments in foreign assets.
4. Gains from Speculation: To gain from the highs and lows of the currency exchange rates, one must have an idea of the possible direction of movement of currencies. For example, if there is a possibility of USD going up because of crude oil price rise, one should buy USD/INR future.
5. Extended Market Timing: One can take advantage of market conditions beyond 3.30 pm as currency trading continues till 5 p.m. Additional market timing also ensures that impact of major news will get factor-in the prices and resultantly there will be less scope for major gap-up or gap-down.

Currency trading is a different ball game for a person who has knowledge of stock market and wants to dive in the world of forex trading. Although, government regulations and frameworks have been made to ease the journey of any trader in this field, these markets demand continuous tracking of new flows and daily prices movements. There is immense opportunity to mint money from currency trading if one can get a good hold on its variables.