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Online trading has led to a surge in financial traders in India. Even for those living in small cities, it is now possible to trade various financial assets. Forex trading is the largest segment worldwide, even though you hear a lot about commodity and equity trading in India.
Like other financial assets like equity and commodities, currency can be traded in both the spot or cash markets as well as the futures market. India's currency can be traded in the derivatives markets as currency options and currency futures.
Forex trading is different from commodity or equity trading. You can trade the shares of a company, or buy and/or sell contracts for a commodity. However, a single currency cannot being traded. You can only trade in one pair of currencies.
The most traded currency pairs are the Euro against the US Dollar, Pound sterling against the US Dollar, and the US Dollar against Yen. The US Dollar is the dominant currency pair traded around the globe.
A few years back, currency trading in India was not regulated. Investors had to open an trading account at foreign brokerages. With proper regulation, it's now possible to trade currency pair futures legally.
Without knowing the meaning of currency pair, it is impossible to trade in currency pairs. A currency pair is a combination of two currencies. Each currency has its own value. If EUR/USD is 1.09 it means that one Euro equals 1.09 US dollars. The base currency of a currency pair is the currency that is used to determine the value of the other currency. The quote currency is the currency that is used to calculate the value of the second currency. The quote currency is used to indicate the currency pair's value. In the above example, the Euro is the base currency while the US Dollar serves as the quote currency.
Stock exchanges in India allow trading of both options and futures currencies. However, currency options are more common than options. Minimum lot size for currency pairs is 1000 of the base currency. As with commodities and equities, currency pairs trading does not display the profit or loss in INR.
In the quote currency, you can see the profit and loss for currency trades. At the end of each trading day, the profit and loss of the trade are converted into INR using the Reserve Bank of India's reference rate. Every day, the central bank releases the reference rates at 12.30 pm. Let's say you buy one lot of EUR/USD currency pairs at 1.0010, and then sell it at 1.0515. Now the profit in USD is (1.0015-1.0010)*1000*1 lot = $0.5. The profit will convert into INR at the reference rate (0.5*76.03 = Rs 38.015).
Like other segments, currency futures trading requires margin money. The margin for all contracts is 2%, with an extreme loss margin at 1%. Although the margin will be in INR the contracts will be traded using quote currency. The margin will then be converted into the quote currency. Trades that are placed before 2PM use the reference rates of the previous day. Trades that are placed after 2PM use the reference rates of the trading day.
Before you start currency trading, it is essential to know your risk profile. Every trader has a different risk profile and each trader forms a trading strategy based on that profile.
Trading currency pairs in India is more important than equity. Because the asset is less popular than equity, there is less information available for small traders. To receive the most current currency news, choose a reliable broker.
Risk management is just as important as the returns from currency trades. Before you start trading, make sure to specify the entry and exit points. This will allow you to keep your losses down.
Although currency trading isn't the most popular in India, it is quickly gaining popularity. It is possible to make decent returns by currency trading if you do your research well and have the right strategy.
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