Online stock trading is far from the only way to make money. As a matter of fact, there are other financial markets that you can trade in. One such financial market is the currency market or the foreign exchange (forex) market.
The currency market is the largest financial market in terms of trading volume and the total value of trades. That’s not all. The forex market is also open 24 hours a day; however, retail individuals are allowed to trade only during a specific window of time.
If the currency market is something that intrigues you, then you can give online forex trading a shot. But before you do that, there are a few things that you should consider. Wondering what they are? Continue reading to find out.
Now, before we get to the main part of the article, let’s first try to understand what forex trading or currency trading is all about.
Currency trading is the process of buying and selling currencies of different countries. It is very similar to stock trading, with the only difference being that you buy and sell currencies instead of stocks. Also, to be able to trade in currencies, you would need to have an online trading account with a broking platform. A demat account, however, is not a prerequisite.
One of the major features of currency trading is that it always happens in pairs. It is not possible to trade in just one currency. That’s why you will see currencies in the market being quoted like USD-INR or EUR-USD.
Now, in the case of the USD-INR currency pair, the currency on the left is termed as the ‘base currency’ and the one on the right is termed as the ‘quote currency’. The number of units of the ‘quote currency’ required to purchase the ‘base currency’ is what is referred to as the exchange rate.
So, if you see that the exchange rate of the USD-INR currency pair is 79.56, it effectively means that you would need to spend INR 79.56 to purchase 1 USD. Depending on demand, supply, and a host of other factors, the exchange rates keep changing from time to time. And currency trading is all about using this exchange rate movement to your advantage to generate profits.
In India, currency pairs are categorised into two types - INR pairs and cross currency pairs. Let’s take a quick look at what these two categories of currency pairs are.
INR pairs are currency pairs that involve the Indian Rupee, which is almost always the quoted currency. The derivative contracts of the following INR pairs are available for trade in India.
Cross currency pairs, on the other hand, don’t involve the Indian Rupee at all. Instead, it consists of two different foreign currencies. Here’s a quick look at the cross currency derivative contracts that are available for trade in India.
Now that you’ve seen the different currency pairs that are available for trade in India. Here’s something that you need to know. There are quite a few online forex trading brokers in India that offer a wide range of currency pairs in addition to the ones mentioned above.
Before you proceed with forex trading online, it is important for you to understand what it is all about and take into consideration a few things. Wondering what they are? Here are 15 things that you would have to take into account when trading in currencies.
If you’re planning on picking up currency trading, this is the first step that you need to take. The currency market is vast, with millions of trades being placed every second. Therefore, it is important for you to educate yourself fully with respect to how the market works.
Fortunately, there are plenty of free courses online that can help you gain some much-needed knowledge about the forex market. Once you’re done with them, the next step is to do your own research. Get to know the basics of online forex trading including the different kinds of instruments available for trade.
Establishing trading goals before you actually start trading in foreign currencies can help give you some much-needed perspective and can make you a better trader. Draw up a comprehensive trading plan before you take forex trading up seriously. The plan should involve setting up targets that you would like to achieve, identifying the currency pairs that you wish to trade, and determining the entry and exit points, among others.
Ideally, your trading plan should adequately compliment your risk profile and your trading style. So, if you’re someone that hasn’t evaluated their risk profile yet, it is advisable to first do that before drawing up a plan.
And while you’re at it, also try to establish your trading style. You could do that by trying out different styles of trading by using virtual trading platforms. Once you determine your style, incorporate it into the trading plan and stick to it at all times.
The currency market is arguably the most riskiest financial market in the entire world, even more so than the stock market. The levels of volatility in the currency market also tends to be high and unpredictable. Therefore, it is important to refrain from using up your entire investment amount for intraday trading in currencies.
Instead, you could allocate a certain percentage of your total investment amount towards currency trading. Considering the high-risk nature of the forex market, you could limit the amount you infuse for trading to around 5% to 10% of your total available amount.
And you could allocate the remaining funds towards other less riskier investments like bonds, debt instruments, and fixed deposits. This will not only help you lower your overall portfolio risk, but will also help with diversification.
In India alone, there are several different broking platforms that allow you to partake in forex trading online. However, not all of them provide the same level of service or support. Full-service broking firms like Motilal Oswal, tend to provide an extensive array of support services like research analysis and more. Discount broking firms, on the other hand, only provide you with a forex trading platform.
Also, the amount of brokerage on currency trading transactions that the platforms charge tend to vary from one provider to another. Therefore, it is important to choose the right broking platform. Go for reputed platforms that are known to offer good customer service. Also, it is important to choose a broker who also levies low brokerage on forex transactions. This can help boost your profitability, especially if you’re someone who is into high-volume currency trading.
As you’ve already seen above, there are multiple different currency pairs that are available for trading in India. However, not all of them are well suited for online forex trading. Some pairs are much more popular than the others, which leads to them having a much higher daily trading volume and liquidity. This can be highly advantageous for intraday trading since it would make it very easy to enter and exit positions quickly.
For instance, among the INR currency pairs available for trading in India, the USD-INR and the GBP-INR pairs are two of the most popular pairs that enjoy significant liquidity. Similarly, when it comes to cross currency pairs, the EUR-USD and the GBP-USD have significant participation, leading to high liquidity.
And so, it might be a good idea to stick to highly liquid currency pairs when trading in currencies. Going for illiquid or exotic currency pairs like USD-RUB or USD-SGD can lead to you getting stuck in positions and unable to exit in a timely manner.
The bid-ask spread is another major factor that you would have to consider when trading in currencies. The bid is the highest price that a buyer is willing to pay for an asset, whereas the ask is the lowest price that a seller is willing to sell the asset. And the bid-ask spread is the difference between these two values.
If the difference between these two values is low, bid-ask spread is said to be tight. On the other hand, if the difference is large, the spread is said to be wide. The bid-ask spread is one of the many metrics that individuals involved in online forex trading look at when determining the level of liquidity in a counter.
Tight bid-ask spreads signify high liquidity, whereas wide spreads signify illiquidity. And as you’ve already seen in the above point, it is always advisable to trade in liquid pairs since it can help you enter and exit positions seamlessly.
Leverage is a very important concept in currency trading. Now, leverage can be defined as a trading mechanism using which you can enter into a large position by simply paying a small percentage of the total trade value. Leverage can be widely seen in derivative contracts like futures and options, where you’re allowed to take up large positions by simply putting up a small margin.
With forex trading online, the leverages tend to be far higher than all other asset classes. You can find brokers offering forex leverages to the tune of 100:1, which means that for every Rs. 100 worth of trade, you’re only required to deposit Rs. 1.
By using leverage, you can quickly enter into a large position by just paying a small amount. And if your position becomes profitable, the amount of return that you get will be very large. On the other hand, if your position goes negatively, the amount of loss that you will have on your hand can also be huge.
So, in short, leverage is a double-edged sword and needs to be used very carefully when entering into a currency trade.
When it comes to currency trading, there are multiple strategies that you can opt for. For instance, there’s positional trading, where you take up a position and wait till the market responds in your favour before exiting it with profits. Or, there’s the scalping strategy, where you make multiple trades within a short period of time with the aim of capturing small price movements.
Likewise, there are plenty of other strategies that you can adopt when trading in currencies. That said, not all trading strategies tend to work in all situations. Some may be well suited for bullish environments, while others may work well in bearish or market neutral situations. So, as a trader, it is important for you to determine the kind of strategy that works in the current market and stick to it. Alternatively, if you’re good at a particular strategy, you could wait till the market conditions become favourable towards it and then employ the same.
Now, just because you’re well versed with the basics of online forex trading doesn’t mean that you should start immediately. On the contrary, you would do well to first ease yourself into it through paper trading. Paper trading is basically a simulated trading environment that’s designed to help individuals practice their trading skills without incurring any financial risk.
There are plenty of virtual trading platforms that allow you to partake in simulated trading. You can use one such platform to practice trading before moving onto the actual market. For instance, you can try out various currency pairs to see which one works best for you. Or, you can employ different trading strategies and observe the results. Once you’re confident enough and get a good hang of things, you can then slowly move towards currency trading in real-time.
If you’re interested in succeeding at currency trading, then market analysis is one of the most important things that you should do. By analysing the market movements, you can gain crucial information that can help you make better trading decisions.
For instance, you could start off by analysing the market movement on weekends. Pick up the charts of the week gone by and search for any unique patterns that appear. By identifying these patterns, you can to a certain extent predict how the market would move in the coming week.
And once you’re well versed with weekend analysis, you could gradually move towards real-time market movement analysis. Here, you will have to analyse the charts and patterns as and when they are formed. This will help you predict the price movements much faster, allowing you to take advantage of short-lived opportunities.
As you know already, the currency market can be very volatile. Even the slightest piece of news can lead to wild swings in the price of a currency pair. For instance, the policies of either the Reserve Bank of India (RBI) or the U.S. Federal Reserve can have an effect on the USD-INR currency pair’s price movement.
Likewise, geopolitical news, elections, and economic data can also have a profound impact on currency price movements. This is precisely why it is important for you to keep a close eye on the market news.
By following the news closely, you can to a certain extent predict how the currency pairs are going to move based on the events. This will allow you to take advantage of the market movements as and when they happen, giving you a slight edge over other investors.
As humans, we’re all prone to biases and getting emotionally overwhelmed. And considering the fact that intraday trading in the currency market is a high-stakes playing field, your emotions can easily lead you astray if you don’t keep them in check. The up and down price movements in a currency pair happen quite frequently. Therefore, it is important to be objective and unbiased irrespective of the current market situation.
If you have a trading plan in place, always make sure that you stick to it no matter what. Don’t get carried away emotionally and close out your positions if the price movement doesn’t match your expectations. Your trading plan, if formed in an objective and technically sound manner, should ensure that you receive the results that you expect and may even minimise the impact of losses, if any.
With high leverages in online forex trading, it is very easy to start off by investing more money than necessary in search of bigger profits. However, it is not advisable to do so, especially if you’re just starting out on your journey.
Putting large amounts of money in the currency market at an earlier stage is highly risky and can even lead you to lose your capital. And if you do happen to lose your capital, you will not be able to trade anymore and will forgo the chance to recuperate your losses.
On the contrary, start slow by investing a small part of your total capital till you get the hang of things. This will help you get acquainted with the market and will also protect you from huge losses. And if by chance you end up with a loss, you wouldn’t have lost too much since you only invested a small part of your capital. Such small losses can be easily recovered gradually over the course of your trading journey.
Just because the currency market is known to be risky doesn’t mean that you cannot manage it. In fact, there are plenty of different risk management techniques that you can employ to ensure that your trades don’t end up losing too much money.
The first thing that you can do to manage your risk effectively is by ascertaining the risk to reward ratio of a trade. If the risk is significantly higher on a trade compared to the reward that it offers, you can choose to not get into it. This is one way to reduce or manage the risk.
Placing adequate stop losses and limit orders are another couple of ways through which you can lower your risk. Stop losses will automatically close your positions early on in the event of losses in a bid to protect your capital. And limit orders will ensure that your trades are executed at the price that you want to instead of the current market price.
As you continue with your online forex trading journey, it is advisable to take some time off and evaluate your performance. This way, you can quickly identify where you went wrong on a loss-making trade and learn from it. And in the next trade onwards, you will stay away from committing the same mistake again.
Now, evaluation of your performance should be done even if your trade didn’t end up in a loss. In fact, you can still learn quite a lot from profit-making trades. For instance, you can create imaginary scenarios to see if you could have increased the amount of profit that you generated on the trade.
Keep in mind that all great forex traders continuously evaluate themselves and learn from their actions and mistakes.
With this, you must now be aware of all the key factors that you should consider when trading in currencies. That said, remember that the 15 points mentioned above are not exhaustive. There are plenty of other points as well, which you will learn as you embark on your online forex trading journey.
If you would like to take up currency trading, but don’t have a trading account with you yet, visit Motilal Oswal right away. You can open a demat account and a trading account and get started with forex trading within a matter of days. With Motilal Oswal, you also get class-leading customer support and an easy-to-use trading platform that’s designed to supercharge your trades.
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