A comprehensive guide to Currency Market

Introduction

If you plan to take up Currency Trading but are unsure where and how to start, here is a quick guide that will help you kick-start your Forex Market journey.

What exactly is it?

Currency Trading refers to buying and selling of international currencies in the foreign exchange market. It is also called Forex Trading. What you should know is that currencies are always bought or sold in pairs. So, your trading decision will move in the direction that you think a currency will depend on another currency.

For instance, if you think that the US Dollar will strengthen against the Rupee in the future, you can trade in the USD/INR pair. If the current value of the USD/INR is 75, $1 is equal to Rs. 75. Since you are bullish on the Dollar, you can buy the USD/INR at this price and sell it later when the value of the US currency goes up compared with the Indian Rupee.

Similarly, there are other cross-currency pairs where you can place your trading bets in India like GBP/USD, EUR/USD or USD/JPY. Remember that the first currency mentioned in any pair is the base currency and the second quote currency.

Before getting into Currency Trading, remember that the Forex Market always deals in lots, not in a single currency unit. This means that you cannot buy 1 USD/INR unit like you can buy one share of XYZ company in the stock market. You must purchase at least one lot of the USD/INR pair, which refers to the minimum size of trade you make as a currency trader.

The lot size for trading in any currency pair in India is usually 1,000 units of the base currency. In the case of the USD/INR pair, the lot size would be $1,000, or around Rs. 75,000 (assuming the current exchange rate is 75).

Why do currency prices fluctuate?

Currency prices are constantly changing. The key factors that trigger the movement in the price of any currency vis-à-vis another currency include geopolitical developments, trade flows, the general economic condition of a country, etc. Moreover, the Currency Market is a highly liquid one that stays active 24*7 with trading happening globally in various time zones. This contributes to the quick change in the prices of currency pairs.

Types of Currency Market

The Currency Market is of two types: spot and derivatives market. In the spot market, currencies are bought and sold 'on the spot'. This means that the delivery of the currency happens as soon as the trade gets settled. On the other hand, the derivatives market is where the Currency Futures and Options get traded. Derivatives allow investors to buy/sell a currency at a future date at a previously fixed price.

In India, an investor can trade only in the derivatives market and not in the spot market. Also, currency derivatives here get cash settled. This means that no actual delivery of currency takes place on the expiry of the derivatives contract. The payment is made in cash, equivalent to the value of the underlying asset.

How to start Currency Trading in India?

If you want a Currency Trading guide, start by opening a Forex Trading Account with a broker registered with India's Securities and Exchange Board. Submit all the KYC (know your customer) details to your broker and deposit the required margin amount.

Then, you get the login and password details from your broker to begin trading on its proprietary Forex Trading platform. These platforms connect brokers with the forex market. In India, currency derivatives get traded on the National Stock Exchange, Bombay Stock Exchange, and Metropolitan Stock Exchange. The trading usually happens from 9 AM to 5 PM.

You can place your orders through your broker or their platform and then settle the trades in cash on the expiry of contracts.

Disclaimer - ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose. The securities quoted are exemplary and are not recommendatory.