Looking to start currency trading in your investments? Do you know how to get started in terms of the process, costing and related formalities? Well, these are some genuine questions you may have. Let’s try to find their answers in this review.
The underlying principle of currency trading is that the values of currencies of different countries keep on changing with everyday events happening across the world. In case you are looking to start current trading, you need to know that the foreign exchange market is the largest market in the world where currencies of all countries are traded.
However, it was not very popular in India.
Earlier, only financial institutions and corporates could engage in currency trading but things are changing fast here. Now, small-scale investors and even individuals are trading in currency markets. If one can form an educated opinion about the forthcoming fluctuations in currencies with respect to each other and wants to gain profits based on it, then, s/he should consider to start currency trading in Indian markets.
If the decision to start currency trading has been made based on knowledge, experience and inclination, then, the following aspects need to be considered and taken care of.
Start Currency Trading – Open a Currency Trading Account
Some stockbrokers allow using a common trading account for equity and currency derivatives while some may require that you open a separate trading account for forex derivatives. In case of opening a separate currency trading account, make a list of all the brokers that are registered with the SEBI.
This is very important because trading in currencies with a broker who is not registered and approved by SEBI is illegal in India. It can get anyone into legal trouble and may also result in financial losses.
Choose the best broker on the basis of the following factors:
Costs involved with opening a currency trading account
Trading platforms offered
The exchange with which the broker has a tie-up
Also, it is recommended to take a demo of the trading software provided by the broker to get a feel and idea of their technology focus.
Make sure to complete the Know Your Customer (KYC) guidelines and submit the documents. This is to comply with the guidelines laid by the Securities Exchange Board of India (SEBI) and Reserve Bank of India (RBI).
This step is common and would need to be followed irrespective of the broker one chooses. The documents required to start currency trading are currency derivatives forms that include agreement, risk, disclosure document in addition to the request letter.
If you are a new customer, identity and address proof will also be needed. Once the processing of all the documents is done by the brokerage firm, you will receive the acknowledgement from the broker and your account would be ready for trading purpose.
You can then use the user id/password combination provided by the broker and start trading through the trading platforms offered.
Start Currency Trading – Online Accounts
As mentioned above, once an online account is opened, you can use the login id and password to login to the trading portal. If you are not comfortable with online trading, then, trading can also be done by opting for the calling facility. Some brokers offer this facility of placing the order via their call centres.
Before you start currency trading, ensure that you understand all the terms, tools and procedures related to it. Also, explore the online portal and be aware of its operational guidelines.
Most stockbrokers provide trading platforms such as:
Terminal Software, which is an EXE file that you can download and install on your computer or laptop
Mobile Trading App, a mobile-based app
A web-trading application that can be run using any browser
If you are a beginner level trader or moving into currency trading for the first time, make sure to remember that currency trading is definitely way more volatile than equity markets. Thus, it makes sense to start small, see whether it works for you and then take a call on how you would like to continue investing in the segment.
Start Currency Trading – Margin Amount
Before you start currency trading, you will have to deposit requisite margin money in your trading account. Generally, the margin requirement is 5% of the contract value but this may be changed sometimes due to market volatility.
There are some things that one needs to know before starting to trade in currencies like:
Trading in currency on the National Stock Exchange (NSE) can be done from Monday to Friday between 9:00 am – 5:00 pm
The lot size for futures is 1000 per unit except for the JPY / INR pair where the lot size is 100000 units.
The four major currency pairs traded in India are USD – INR, EUR – INR, GBP – INR and JPY – INR. USD / INR is the most popular and liquid currency pair in India, followed by GBP / INR.
After knowing the basics, let us understand how currency trading is done with the help of an example:
Suppose one is bullish on EUR and anticipating the value of EUR to increase with respect to INR, then, he will buy futures of EUR / INR.
Similarly, if one is bearish on EUR and anticipating the value of EUR to decrease with respect to INR, then, he will sell EUR / INR.
A lot of beginner level traders assume currency trading in India is similar to Forex trading. This is a total misconception. Currency trading in India is allowed only under the rules laid out by SEBI and can only be done through Indian stockbrokers.
Forex trading, as such, is not regulated by SEBI or any regulatory body in India. In fact, it is actually not completely legal to indulge in Forex trading.