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Forex Trading 101

Author: Administrator Account/Wednesday, February 24, 2010/Categories: Currency

Forex Trading 101

Indian currency futures and options market has witnessed rapid growth since its launch on National Stock Exchange in August 2008 and October 2010 respectively. In the previous article of the series, we discussed some of the common myths surrounding in this regard. Now let’s begin with the basic questions pertaining to forex or currency markets:

What Is A “Currency Pair”?

Currency pair is nothing but the value of one particular currency in terms of another currency. As the name suggests, two currencies are involved in one currency pair, we call them base and counter currency. To make it easier to understand let’s take an example of a currency pair US Dollar-Indian Rupee (INR). This currency pair simply tells us how many Indian rupee we need to purchase $1. Here base currency is dollar and Indian rupee is counter currency.  

For example if we say rupee is trading at 64, it implies, $-INR currency pair is trading at 64 or simply we can say, we need 64 Indian rupees to purchase $1.

Who Are The Participants In Currency Markets?

In general, key participants in currency market are those banks or corporate who have exposure to international currencies. Such participants could use currency market to hedge their currency volatility risk. Therefore major volume comes from such big players however lately we have also seen rapid increase in numbers of retail participants or individual traders. These days currency market can also be seen as marketplace where individual traders or investors can trade based on their near term or long term view on currencies. It is quite similar to stock market and commodities trading in this fashion.

For example if one trader expects depreciation in rupee from 63 to 64 in near term or we can say he’s expecting USDINR pair to move up from 63 to 64. Then he can simply buy the pair’s futures contract near 63 with any of the given Indian exchanges and can book profits when his expected target of 64 has reached.

Can Intraday Traders Or Day Traders Trade Currencies?

Certainly yes! As in day trading, traders look for profitable opportunities to enter and exit the market within the same day. And the good news is, if we look at the global statistics, indisputably currencies market provide great opportunities for intraday and day traders. Historical data proves that in recent years Indian currency market’s high volatility grabbed the attention of not only positional traders but also intraday retail traders.

Trading In International Currency Pairs

Can a trader with a view on international currency pairs like EURUSD, GBPUSD or USDJPY can trade in Indian market?

Although these given currency pairs are not traded on Indian exchanges. However the good news is that a trader still can make profit by making favorable positions on Indian exchanges based on view on these international currency pairs. For example if a trader expects EURUSD currency pair to move up in near term then he can simply go long on EURINR and short on USDINR pair in Indian market. By doing so he shall make money if EURUSD moves up as per his expectations. The same way traders can exploit expected price movement in GBPUSD and USDJPY by trading on Indian exchanges.

What Investment Is Required To Start Trading Currency Futures? 

Currency trading in India can be done with minimal investment (Refer to the table Exchanges Offering...). Margins required to trade one lot of currency futures is much lower than margin required for trading equity or commodities futures. As on date, margin money required to trade one lot of USDINR currency pair may vary between Rs 1300-1600. Lower margin requirements in currencies make it more attractive and easier to manage for retail or individual traders.

Is Trading In Currencies For Long Term More Profitable Than Intraday?

For individual traders, it depends on preference according to some factors like the time one can devote for trading and resources available etc. Intraday trading requires more time and efforts with more resources to track the market consistently whereas a long term traders can trade based on their long term view and don’t need to bother about day to day price fluctuation.

What Factors Are To Be Taken Into Account While Trading In Currency Market ?

To analyze the currencies market, it is crucial for a trader to have a basic understanding of global economy. There are a numbers of factors like important economic events, news updates etc, that may bring high volatility in currency market. Apart from these fundamental factors, a trader can also form a view based on technical analysis. We will discuss these fundamental factors impacting currencies market with detail in the next article of this series.

To be continued… 

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The technical studies / analysis discussed here can be at odds with our fundamental views / analysis. The information and views presented in this report are prepared by Karvy Consultants Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Consultants nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate companies is required to disclose his/her individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Consultants Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures or other derivatives related to such securities.