Is Currency Trading Profitable? Can You Get Rich by Trading in Currency? What are the risks involved? Is it better than Equity trading or Commodity trading?
Well, such pertinent questions are pretty common in nature, especially among the enthusiast traders. Let’s get the answers to these queries, but before that, here are a few basics you must be aware of about Currency trading.
Foreign Exchange markets are the largest financial markets in the world. Trading in foreign exchange markets averaged $5.09 trillion per day in April 2016 and this number has already increased by a reasonable percentage by 2018. Currency Trading has started picking up steam in India as well.
However, people are a little more hesitant in trading currency markets as compared to Equity and mutual funds.
Is Currency Trading Profitable – Basics
In order to examine whether currency trading is profitable or not, let us see who all are actually involved with currency trading and their purposes. The major Participants of currency market in India are government and central banks, banks and other financial institutions, hedgers and speculators.
While banks and governments participate in the currency market for regulatory and economic purposes, hedgers and speculators are involved with currency market purely for profit-making reasons.
Let us see how hedgers and speculators derive their profits from currency
If one is doing business in other countries and wants to protect himself/herself from unwanted fluctuations in currency, one can take appropriate positions in currency markets and hedge potential losses.
For example, if an importer is of the view that USD/ INR is going to appreciate and he has some payments to make at a future date, then, he would buy USD/ INR to hedge his foreign exchange exposure.
Similarly, if some exporter wants to hedge his foreign exchange exposure, he can hedge his future receivables. So, in this way, currency trading is profitable and in fact essential for businessmen and traders.
They are those people who speculate on the short-term movements of currency based on macroeconomic and microeconomic factors. They take their positions in the currency market as per their anticipation and get profit if the currency moves in their expected direction.
Even if the currency starts moving in the opposite direction, they always have an option to square off their positions as soon as their pre-decided stop loss is reached. It is highly recommended for all traders to set up a stop loss before entering each and every trade because it is always better to take some minimum acceptable level of loss in order to save oneself from big losses.
Example of speculation: If one expects that oil prices are going to rise in the near future and going to have an impact on India’s import bill, then one can buy USD/ INR. This is because one is expecting that the value of INR would depreciate with respect to USD.
Similarly, if there is news of huge investments from FIIs, one would expect INR to appreciate against US dollar. In this case, one can earn profits by selling USD/ INR.
In these ways, currency trading is profitable for speculators. For this, one has to be completely up to date with the news that can concern currency markets.
Another way the currency market is profitable for traders who can detect arbitrage opportunities in currency markets. The arbitrage opportunity is a completely riskless way to earn profits from any market.
Although these opportunities are rare and quickly move away if grabbed, one can earn good profits by taking advantage of the exchange rates of one currency in different markets and different exchanges.
Leverage is the ability to trade more money in the currency market than what is actually in one’s account.
For example, a leverage of 1:10 would mean that one can trade for ₹10 for every ₹1 that is actually in one’s account. This is because of the facility of margins. Instead of paying the full amount, one can trade just by paying a % value called margin money.
Many forex brokers provide leverage up to 1:1000.
Although we can say that due to margins, currency trading is profitable but it is a double-edged sword. If the market starts to move in the opposite direction, mark to market losses has the ability to wipe out the entire account of a trader. That’s why setting stop loss is a must before entering a trade.
Like any other kind of trading, currency trading also has some risks involved. But if you are in certain businesses, currency trading becomes a kind of requirement. If traded properly with good strategies and discipline, currency trading is definitely profitable.
Having said that, it is highly adviced that you learn some of the top performing currency trading strategies in India and then make your move in the market.
All the best!
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