When you are starting your journey to investment/trading, it is very easy to get disappointed due to their unrealistic expectations regarding returns. Compared to traditional forms of investing, the forex market is the most dynamic and the largest financial market in terms of trading volume. Despite its popularity, it is underrated in India for its potential to offer better gains easily when accompanied by knowledge with a full strategic plan. Forex trading may be an ideal option for you if you wish to look at trading options past the stock market. Read the article to know more about the forex market, how to participate in foreign exchange trading, its legal validity, risks and benefits involved, and certain valuable tips and tricks, which will help you slowly and easily ease into it.
What Is Forex Trading?
Consider the situation whenever you travel abroad; you need to trade the Indian currency into the currency of the country you are travelling to, which makes it likely you have made a forex transaction. Thus, forex trading may be explained as a mechanism enabling dealers to sell or purchase foreign currency at an agreed-upon price. Owing to the huge volume of currency exchange, fluctuations in prices for some currencies may be extremely unpredictable and volatile, that increases both the risk and the potential for enormous profits, which is the primary feature that makes forex trading so alluring to traders.
While a significant number of forex trading transactions are typically performed for practical purposes. However, a majority of exchanges of currencies are carried out to generate returns. Banks, corporations, investment companies, hedge funds, and individual traders use forex trading for several purposes, such as business, tourism, and enabling global trade.
Unlike limited hours of stock trading, forex trading is available 24 hours a day, seven days a week, for buying and selling currencies in the market known as the forex market. Every forex trading is done over the counter (OTC), which implies that there is not any physical exchange (as in the case of stocks) with a network of international banks and other financial institutions, rather than a single exchange like the New York Stock Exchange, regulates the market.
How does Forex Trading work?
Just like stocks or other financial instruments, forex is traded in pairs in the forex market. Identical to the ticker symbol for a stock, each of the widely traded currencies has been allotted a three-letter code. Every pair of the currency exhibits the two currencies’ most recent exchange rates. Thus, the information could be interpreted with the help of an example. For instance, using the EUR/USD, or euro to the dollar exchange rate, the euro is the base currency on the left, and the currency on the right (the US dollar) shall be known as the quote currency.
Trading on the forex market involves speculating on the strength of one currency compared to another. For instance, if a trader accesses the OTC market and buys USD/GBP, he speculates that the dollar’s value will rise two times as much as the pounds. In contrast, if he decides to sell EUR/AUD, it implies that he expects the Australian dollar will lose value compared to the euro.
The exchange rate shows how much of the quoted currency is required to purchase one unit of the base currency. Accordingly, the quotation currency varies depending on the market and the sum of the currency required to buy 1 unit of the base currency. Like in any other market, supply and demand between buyers and sellers determine currency exchange rates. However, the forex market is also greatly influenced by other macro influences such as changing interest rates, central monetary policies, economic expansions, and political stability of the nation, which could also impact demand for specific currencies. Since speculation and hedging make up a sizable amount of currency trading, traders need to know the processes that could result in abrupt rises in currency values. Meanwhile, there isn’t a single marketplace or exchange in a central location; all trading is conducted via computer networks, often known as the OTC market.
Benefits of Forex Trading
Provided below are some of the key benefits of forex trading for beginners-
- Access to Global Forex Market– The sheer magnitude of the market itself is one of the other reasons contributing to it being a profitable trading venue that goes as high as more than $4 trillion per day speaks volumes about the importance of the foreign exchange market. Traders from all around the world partake in the expansive global foreign exchange market.
- A Great Option for Beginners- For beginners who are looking forward to making smaller investments, forex market trading could be an ideal option. Generally, brokers have the feature for offering demo accounts for their beginner clients. Before entering any transactions, new traders could use them to practice their skills in a market simulation.
- Constant 24×7 Availability – Given the global nature of the forex market, trading can go on almost continually throughout the day as a market is open somewhere on the planet. Therefore, the market continues throughout the day; for instance, Sydney, the first significant market in Australia, starts at 5 pm on Sunday and stops when New York, the US’s largest market, closes at 5 pm on Friday.
- Allows Leverage- Foreign currency brokers allow ordinary traders to borrow against a small amount of cash, allowing them to open a significant position in the market. A ratio typically shows how much money you raise through leverage. A leverage ratio of 1:30, for example, indicates that your investment in the market was 30 times more leveraged.
- Instant Liquidity- Due to the enormous volume of trade that takes place around the clock worldwide, the forex market is regarded as the most liquid marketplace in the world. Hence, forex trading allows smoother selling or buying of foreign exchange, and the liquidity on the forex markets enables you to trade with lesser risk.
- Higher Volatility- Market volatility signifies the sensitivity of the market. Among all others, the forex market is the one that is hugely affected due to a wide variety of factors such as geopolitics, economic stability, legal regulations, natural disasters, trade agreements, etc., among others. Thus, this factor leads to the potential for higher returns rewards when the values of currencies shift for the better, with an equal potential for substantial losses in the case of a negative impact on the market. Therefore, traders must have certain strategies in place for handling turbulent markets.
- No Restrictions on Directional Trading- In contrast to the stock market, there are no restrictions concerning directional trading on the foreign currency market. Since traders constantly purchase and sell currencies following market conditions, any trader/investor could trade short or long based on speculations due to a shift in their value. Due to the greater liquidity of foreign exchanges, brokers do not levy transaction fees for such trading, which is necessary for stock markets.
- Low Transactional Fees-Without incurring significant transaction expenses, one just needs a small amount of funds to get started with online forex trading. The broker’s commission, which he receives from spreads, makes up most of the transaction cost. The spread, the gap between the asking price and the bid, is expressed in pips or points in percentage.
- Technology- Since this market continues to expand, one benefit of foreign exchange is that those who use it embrace technology proactively. Numerous software programs and smartphone applications enable traders to undertake real-time global trade.
How to start forex trading for beginners?
Provided below is the step-by-step process to initiate trading for beginners-
- Open a spread betting or CFD trading account. It could be a live or demo account to trade on price fluctuations on currency pairs.
- Start your search for the currency pair you want to trade. Keep updated about any market news that could impact forex, or speak with your broker to acquire the latest information.
- Decide whether you wish to buy/sell based on your research. Find out whether the base currency, the first listed currency in the pair, is likely to strengthen or weaken as per your research. If you think it will strengthen, purchase it or short-sell the currency if you think it will weaken.
- Adhere to your plan, and ensure that you follow the strategy that must include risk management, which has been adequately followed before initiating a trade.
- Place your FX order- Set certain entry and exit points that could help you to stick to your approach while placing an order for forex. Also, remember to use certain risk management tools, such as a take-profit or stop-loss order, wherever possible.
- Close your trade & reflect on it- As per the trading plan, you could exit the market at the pre-defined exit boundaries. Once completed, reflect on your performance to improve your trade performance.
Key Strategies for Forex Trading for Beginners
Trading market movements over a while, such as a few minutes or several days, allows traders to differentiate their methods based on timescale and market-specific factors. Beginners can test different Forex strategies with a demo account and choose their preferred technical indicators for entry and exit points. Some of the most common forex strategies include: choosing one of the best Forex trading systems for beginners. Such strategies include the following-
- Currency Scalping- Forex scalping is quickly buying and selling currency pairs to accumulate small profits. It is best suited to traders who can commit much of their time to trade and are focused on technical analysis.
- Intra-day Trades- Intraday trades are a conservative Forex trading approach focusing on four-hour or one-hour price trends. Forex day trading is for traders who enter and exit at least one trade per day by predicting daily market movements and may be best for those who prefer shorter-term trading methods.
- Swing Trading- Unlike scalping or intraday trading, swing trading is a medium-term strategy emphasising larger price changes. Positions are held for several days with the intention of buying at “swing lows” and selling at “swing highs”—or vice versa if going short. Compared to other methods, this requires less time for market trend analysis, but it also entails an increased risk of a market “gap” and overnight holding expenses. The technique is most effective for traders who value a balance between fundamental and technical analysis, sustaining positions open for several days and purchasing at “swing lows” while selling at “swing highs.” It is ideal for people who choose to trade in addition to their regular jobs.
- Positional Trading- It involves sustaining holdings over a longer amount of time while disregarding short-term price swings. It may be a good option for traders who wish to devote more time to understanding the underlying principles of the market rather than focusing time on performing technical analysis or placing trades.
Is Forex Trading Safe for Beginners?
As a Forex trader, there are various risks that you should be aware of. Consider the following dangers when making your notes for beginning Forex trading:
- Risk Associated with Leverage- Leverage in trading might affect your trading results favourably or unfavourably. Your gains or losses will be greater the higher your level of leverage.
- Interest Rate Risk- If the interest rate in a country increase, the currency may appreciate. An increase in investments in that nation’s money markets is likely responsible for the increase in strength, as bigger returns are possible with a stronger currency. But if the interest rate drops, the currency would weaken, which might cause more investors to sell their stocks.
- Transaction Risk- This risk involves the exchange rate. It could be generated by the different time zones between the various countries, which may occur at any time between the initiation and end of the contract. Exchange rates may fluctuate throughout the day up until the trade is settled. The risk increases with the time between signing a contract and its conclusion.
Forex Trading Tips for Beginners
Here are some helpful tips for succeeding in FX trading while minimising significant risks-
- Research Your Markets- Learning about the Forex market is one of the best strategies to prevent trading losses. Before you risk your money, be informed about the currency pairs and the factors that influence their prices. This will help you avoid making simple mistakes that could cost you more than you can afford to lose. Investing time in this could potentially avoid anxiety and significant financial loss.
- Follow Your Plan- Making a trading plan is crucial in preventing losses. Many traders specify their approach, evaluation standards, risk tolerance level, and profit objectives. Once you have a plan in place, ensure that no trades you make depart from its parameters.
- Keep Practising- With a free demo account, you can implement your strategy. Without risking your money, you may experience what it’s like to trade currency pairs using your trading strategy.
- Forecasting Market Conditions- Some traders opt to forecast the markets using current events in the news or other financial and political information. These are referred to as fundamental traders. Some people use technical analysis techniques like moving averages, Fibonacci retracements, and other indicators to predict market movements. They are referred to as technical traders. A lot of dealers employ both. Whatever your preferred trading method, it’s vital to remember the resources your platform offers you to improve your market forecasting.
- Stick to your Limits- This is a basic yet important rule. This includes understanding when to quit a losing trade rather than waiting, establishing stop loss levels appropriately, and utilising a leverage ratio under your circumstances while taking risks according to your risk appetite.
- Knowing When to Stop- You don’t have time to spend every waking moment watching the markets. By getting you out of the market at the price you specify and helping you better manage your risk and possible earnings, stop and limit orders. Trailing stops, which lag your position as the market moves by a predetermined amount and assist in safeguarding profits in the event of a market reversal, is particularly advantageous. You might not always be able to reduce your risk of losses by placing contingent orders.
- Adopt an Intelligent Approach– You have an open position, and the market is not working in your favour. It wouldn’t hurt to make up the difference with a few trades that don’t match your trading strategy, right? “Revenge trading” rarely has positive results. Avoid allowing emotion to interfere with your strategy for profitable trading. It’s smarter to stick to your plan and make up the lost money little by bit than to suddenly discover yourself with two devastating losses when you have a bad deal.
- Don’t Be Afraid of Growth- Consistency is crucial, but if your trading strategy isn’t functioning as expected, don’t hesitate to change it. Your strategy should always reflect your goals as your experience grows and your demands could alter. If there are changes in the objectives of financial conditions, you should consider changing your strategies.
- Choose the Ideal Broker Services– To start your journey as a forex trader, it is necessary to select an ideal trading brokerage firm that offers several factors, including reasonable pricing, execution, and 24×7 customer support.
Forex trading in India has gained immense popularity among the masses in recent years due to exciting opportunities and higher profit potential. The forex market in India has grown up to be the most liquid and dynamic market in the world, fulfilling transactions worth trillions of dollars every day. Whether trading on the spot market, in the futures or options markets, or both, investors and hedgers can choose an instrument and leverage as per their preferences.
To handle currency fluctuations, the forex markets offer a framework that includes everything from sophisticated speculative strategies to standard hedging practices. But, at the same time, the forex market is also volatile, which comes with many serious market risks. Accordingly, beginners must hold a solid trading strategy and only take limited risks per their risk appetite.
- Is it possible to do forex trading without a broker?
No, trading in pairs of currencies is impossible without a SEBI-approved broker in India. SEBI allows traders to sell or buy derivatives through permitted brokers on authorised exchanges.
- Is it possible to undertake forex trading through a Demat account?
Since forex trading in India is settled in cash, there is absolutely no necessity to hold a Demat a/c; the base currency will never be delivered to the trader. Thus, a trader shall not be required to trade in currency pairs. But, to trade in currency derivatives, the traders must open a trading account.
- Is foreign exchange trading permitted in India?
While trading in foreign exchange and other currencies is permissible in India, it is against FEMA regulations to use unlicensed brokers or exchange currencies other than those listed. Make it important to verify the broker’s credentials if you are considering engaging in online FX trading.
Those found to be in non-compliance with the FEMA regulations and engage in illicit trading shall be fined up to Rs 10,000, along with additional fines for additional days of the violation, which could be assessed at the same rate per day violation. According to 13(1C) of the FEMA Act, 2000, when a trader is found to be involved in illegal forex trade activities, he could face imprisonment for up to five years.