Demat account is not required to start forex trading in India as you won’t get delivery of forex in your account at the end of the day.
All the trades are cash-settled. You need only two accounts, a forex trading account, and a bank account to start forex trading in India.
Factors to Consider Before Opening a Forex Brokerage Account
Leverage is the multiplier, the X times the margin for which you can take a position. For example, if you have $10,000 in your account and have a 10 times leverage then you can take a $10,000 x 10 times = $100,000 value of the position.
Forex brokerage houses provide a varying amount of leverage in a range of 50:1 to as high as 300:1. Leverage allows you to make large gains with a small investment. However, losses are also amplified in case the trades go wrong.
Essentially, the higher the leverage, the higher is the level of risk involved. Brokerage houses have protective stops to prevent an account from going negative.
#2. Commissions and Fees
Unlike stock trading, you don’t need to pay fees on each forex trade. Forex trading deals directly with market makers and not through brokers.
Spread on a currency pairs is what differs from firms to firms. The difference can be as small as one pip (0.0001), but with large volume, it can make a significant difference. Larger spreads allow more pips to capture or lose.
You need to check the spreads offered by the brokerage houses on the currency pairs which you intend to trade.
#3. Other Factors
The other factors which count in a selection of the best forex broker in India are the different levels of services & programs offered to differentiate a privileged member and the fees charged. Plus the education support and training programs offered.
The forex brokerage houses are regulated, market participants. Look for the number of countries under which the firm is regulated.
Regulated market participants are required to have certain minimum capital and follow benchmark standards which result in healthy trade practices. Check the reputation of the company before opening an account.
How to Do Forex Trading in India 2023
Forex trading can be done either by buying and selling currency pairs or by purchasing derivatives such as options and futures. Both of which is quite similar to equity trading.
#1. Buying and Selling
In simple buying and selling currency pairs, you are long on the pair with a belief that the value of the pair goes up and you benefit in the process.
For example, let us assume you purchased a GBP/USD pair at 1.2936. You will profit if the value increases to 1.2937 and above and lose money the moment the value decreases to 1.2635 and below.
The pair rises when the GBP increases in value against the US Dollar.
#2. Using Derivatives
The other way to trade in forex is to use derivative on the currency pairs like futures and options.
Buying a futures contract creates an obligation to buy the underlying currency pair at a set point in a future date. Whereas purchasing an option on a currency pair gives you the right to purchase the currency pair at a set rate before a set point in a future date.
In options, you are purchasing the rights and need to exercise it or let the right expire before the set future time and date.
Derivative products can be a bit complex in the beginning but you should understand the basics to start trading.
Types of Forex Trading Orders
Now that you know the forex trading, it will be handy to know various types of orders which can be placed.
#1. Market Order or a Limit Order
This is the very first order to open a new position which can be a buy (long) or sell (short) position. Now you have two choices
To take a position at whatever exchange rate currently available in the market which is called the market order.
The market order is executed immediately at the exchange rate currently available.
Another way is to set the rate at which you want to buy or sell which is called the limit order.
Limit order gets executed when the rate comes to a predefined limit.
#2. Take-profit Order
For an open position, a trader may want to lock profits which can be done by placing a take-profit order.
For example, a trader is optimistic that the GBP/USD will touch 1.2940, but not very certain of the rate moving any further. In that case, he can place a take profit order and lock in the profits.
The take-profit orders also get executed when the rate reaches the predefined set limits. It may be possible that the rate may move further ahead or may not reach the limit to get the order executed.
#3. Stop-loss Order
The stop-loss order is just the opposite of take-profit order, where the trader restricts losses.
For example, you take a long position in GBP/USD at 1.2936 and know that the maximum losses which you can bear are of 3 pips. In such a case you can place a stop-loss order for closing the position at 1.2933.
Stop-loss order restricts the losses in case the rate moves further down.
How Much Leverage is Right in Forex Trade
Forex trading involves leverages up to 300:1, which means you can trade for amounts up to $30,000 with just $100 in your account.
Misuse of leverage is one of the reasons why forex traders lose money. The prudent way is to get yourself educated and choose a comfortable level of leverage corresponding to your forex trading skills.
#1. Risk of High Leverage
High leverage is akin to borrowing large sums of an amount to take positions. Any adverse rate movement can ring in eroding large capital.
Let us understand with an example. Let us assume that you have a $1000 in the account and use a 200:1 leverage which means you have borrowed $200 for every single dollar you have.
Now you can trade up to $1000 x 200 = $200,000.
Forex trading happens in three lot sizes. Standard lot with 100,000 units, mini lot with 10,000 units and micro-lots with 1000 units of any currency.
With $200K you can buy 2 standard lot.
One pip movement in standard lot correspond to 100,000 x 0.0001 = 10 units of change. Thus each pip movement will cost $10 x 2 = $20. If the trade goes against by 25 pips then you stand to lose 25 pips x $20 = $500. Which is 50% of the total amount of capital.
#2. Lower Leverage
Now in the same example if you would have restricted to leverage of 50:1. Then you would have $1000 x 50 = $50,000 to trade. Which is sufficient to purchase 5 mini lots.
In mini lots, one pip movement cost $1. Thus each pip movement will cost you $5.
Now if the position goes wrong even by 25 pips, then you stand to lose $5 x 25 = $75. Which is 7.5% of the total amount.
How to Pick the Right Leverage Level
If you have just started and still learning lower leverage of 5:1 or 10:1 would be appropriate. Picking the right leverage will take time and experience to come by.
The prudent way is to
- Trade forex with a comfortable level of leverage
- Place stop-loss orders to reduce losses and
- Limit each position to 1% to 2% of the total capital
Understanding Bid, Ask, Spreads & Pips in Forex Trading
For a new person, quoting standards in the forex market can be confusing as there are no strict rules.
Quoting also depends on the country. Most nations use direct quotes, however, countries like Canada, UK, Australia and New Zealand use indirect quotes.
A quote is a pair of currency, where the value of one currency is reflected through the value of another currency. A quote for currency pair of the British pound and US Dollar would look like GBP/USD = 1.2936.
The pair will also represent the currency you are trading. The first currency (GBP) is the base currency and the later currency (USD) is the quote currency.
The base currency is always equal to one unit. The most used base currency is USD (US Dollar), EUR (Euro), GBP (British Pound) and AUD (Australian Dollar).
The quoted amount of 1.2936 is the amount of the quote currency (USD) equivalent to 1 unit of base currency (GBP). Which means 1 GBP = 1.2936 USD or that with 1 GBP you can buy 1.2936 US dollars.
Direct & Indirect Quote
Quotes can be direct or indirect based on the domestic currency.
In a direct quote, the domestic currency is the quoted currency. For example, for a US-based forex trader GBP/USD, is a direct quote.
In an indirect quote, the domestic currency is the base currency. In the above example for a British forex trader GBP/USD is an indirect quote.
In other words, suppose USD is the domestic currency then GBP/USD = 1.2936 is the direct quote in which with 1 GBP you can buy 1.2936 USD and USD/GBP = 0.7730 is the indirect quote where 1 USD can purchase 0.7730 GBP.
#2. Bid & Ask
You will always find forex quotes with a bid or buy price and ask or sell price. Both of which are essential with reference to the base currency.
BID – When you intend to buy a currency pair, the ask-price refers to the amount of quoted currency that has to be paid in order to buy one unit of the base currency.
Here, in order to buy 1 GBP, you need to pay 1.2944 USD.
ASK – When you intend to sell a currency pair then bid price is considered, which reflects how much of the quoted currency you will get when selling one unit of the base currency.
Here, on selling 1 GBP you will get 1.2940 USD.
In the quote ASK price will always be higher than the BID price.
Another easy way to get the hang of the terms is to think yourself of visiting the forex market where banks and participants are ready to buy and sell currencies.
The Bid price is what the bank is ready to “buy at” and Ask price is what the bank is ready to “sell at”. In the above example bank is ready to buy 1 GBP at 1.2940 and ready to sell GBP at 1.2944
You can buy 1 GBP at banks sell (ask) rate and sell 1 GBP at banks buy (bid) rate.
#3. Spread and Pip
The difference between the Ask price and the Bid price is the spread. In the above case, the spread is 1.2944 – 1.2940 = 0.0004.
Pip is the smallest amount a price can move in any currency quote. In the GBP/USD quote, the smallest price movement can be of 0.0001. Hence one pip would be 0.0001.
Most Popular Currencies for Forex Trading in India
#1. The U.S. Dollar (USD)
The USD has globally wide acceptance in trade and commerce. The U.S. Dollar is highly liquid and is the most traded currency having a pair with all the major currency across the world.
Plus dollar is the most sought out global reserve currency used by central banks of almost every nation.
#2. The Euro (EUR)
The Euro is the second most traded currency and the second largest reserve currency used across the world for trade and commerce. The Euro is largely used by multiple nations as a common currency in a eurozone
#3. The Japanese Yen (JPY)
The Japanese Yen is the most traded currency of Asia. The Yen reflects Japanese manufacturing-export strength.
#4. The Great British Pound (GBP)
The Great British Pound is the fourth most traded currency due to high liquidity. The GBP has high value due to its relative association to peers like USD.
#5. The Canadian Dollar (CAD)
The Canadian Dollar is the world’s foremost commodity currency. The CAD has a high correlation with crude and the neighboring currency USD.
#6. The Swiss Franc (CHF)
The Swiss Franc is considered as safe heaven in forex markets because of its negative correlation to the Canadian dollar, Australian dollar and US treasury yields.
#7. The Australian Dollar (AUD)
The Australian dollar offers the highest yields among the other popular currencies. The AUD has a correlation with commodities like gold and silver.
Most Commonly Traded Currency Pairs
All the countries have their official currency but few of them trade actively in forex markets. The demand is always there for highly liquid currencies of the developed countries which are politically stable like USD, GBP, JPY.
The list of commonly traded pairs in no specific order is as under
Reasons for Currency Fluctuations
Changes in interest rate, GDP, consumer confidence, inflation, unemployment, political stability of a particular country has a huge impact on its currency movements.
Depending on the announcement and the current state of the country its currency can exhibit large fluctuations which can lead to extreme gain or losses.
Below is the list of economic indicators that are generally considered to have the greatest influence on the currency.
#1. Employment Data
A strong increase in employment indicates that the country has a prosperous economy which can affect positively. While decreases are a sign of potential contraction, so the data could send the currency downward.
Economic data and the movement of currency will often depend on the circumstances that exist when the data is released.
#2. Interest Rates
The higher interest rate tends to attract foreign investments, thus increasing the value of the home currency. Conversely, lower interest rates are unattractive for foreign investment and hence decrease the currency’s relative value.
Price increases are signs of inflation which depreciates the home currency.
#4. Gross Domestic Product (GDP)
GDP measures the economic health of the country. The healthier the country, the more foreign investment it attracts, which ultimately leads to an increase in the value of the currency.
#5. Trade and Capital Flows
Exports and Imports create huge monetary flows between countries which have a large impact on the value of their currencies.
A country with more imports than exports will see a decline in the value of its currency as it needs to purchase foreign currency by selling its own currency.
#6. Macroeconomic and Geopolitical Events
Events such as wars, elections, financial crises and monetary policy changes have the ability to change or reshape the country’s fundamentals. Hence, the biggest fluctuations in the forex markets result from these macroeconomic and geopolitical events.
Is Forex Legal in India
Under LRS (RBI’s Liberalised Remittance Scheme), all the resident individuals can freely remit up to $250,000 for any permissible current or capital account transactions in a financial year.
The LRS cannot be used by HUF, trust, partnership firms and corporates for remitting money.
However, the remittance facility has certain restrictions. Below is a snapshot from RBI website highlighting one of them
Now interpretations can differ as you are funding the account.
Please make an informed decision as there are still debates on the legality of the same. Better if you can consult a lawyer having expertise on forex matters.
By that time you can start learning and practicing forex trading by opening a practice or demo account.
The demo account mimics the actual trading and movements happening in the market with a facility to place orders and execute a trade without involving any real money.
Pros of Forex Trading
- Low Cost
- Offers High Liquidity
- No central exchange
- Variety of currency pairs to trade
- Low capital requirement
- Ease of trading
Cons of Forex Trading
- Lack of transparency
- The complex price determination process
- High Risk and High Leverage
- High Volatility
I tried to provide complete information on how to trade forex in India. Let me know what is missing in this article so that I can cover it in the next updated version next month.