What is Forex Trading?
Forex Trading (Foreign Exchange Trading) or alternatively known as currency trading is a business activity of buying or selling foreign currencies either with base currency of the country where you are trading or against the currencies being traded in the market. An example of a forex trading is to buy the US Dollar while simultaneously selling Indian Rupee, or vice versa. Similar to stock and commodities trading, forex trading can started with a small amount. In contrary to stock exchange, the working hours for trading in forex is not limited and can be traded 24X7. According to the recent estimates from Dow Jones, one of the largest business and financial news companies, forex trading locks about $4 trillion in United States alone.
Forex Trading in India
Unlike traditional investments into stock markets over the years, forex trading has picked up momentum in the recent past in India as the thinking of the people has started changing towards stock market risks. FEMA, the act introduced by finance ministry in the year 1999 for management of foreign exchange, does not permit any transfer of funds for the purpose of forex trading either in India or overseas for individuals in India. However, one can invest in currency derivatives approved by SEBI, a controlling agency namely “Securities and Exchange Board of India” and trade them in stock markets. A currency future or derivative is an agreement between the two parties engaged in buying and selling which works on the principle of the value of the assets it represent. It is a contract set on a future date for trading a given foreign exchange against other. Since resident Indians are not permitted to hold foreign exchange, you may ask your NRI friend or relative to remit foreign exchange and conduct trading on behalf of them as they are not bound by limitations.
What makes foreign exchange to vary?
- The political happenings in a country strongly affect its value. When an existing elected government goes to polls for re-election, chances of the political party in power getting re-elected dictates currency value because of the continuity or changes to the monetary policies and fiscal discipline.
- The natural calamities such as earth quakes, tsunamis, tornadoes can cause havoc on the nation and thereby affecting its fiscal position and can lead to changes in its currency value.
Risks and benefits associated with forex trading
In the first place forex trading is market driven and one should have some fundamental understanding of the vagaries of foreign currencies and their market strengths. It is always better to learn basics from the experts in the field. With some strategic planning and following tips and tricks of the trade one should be able to start off gainfully although it may a little confusing to the freshers. The general technical and financial analyses have proved that forex trading is less risky compared to equity and commodities trading. Again forex trading also depends on the currency market and risks that are associated with it. The longer you stay in the market, the better are the chances of making decent profits in the range of 20 to 40%.
Tips and tricks of forex trading for the beginners
1. Get yourself trained in forex trading either through online or print books or by attending some exclusive short term courses.
2. It is always good to begin with demo type account for a couple of months before you gain confidence. The demo currency account simulates the market environment in a virtual manner.
3. Forex markets follow certain trend and it is wise to follow the trends unless you have profound knowledge and good trading acumen.
4. Trends can be either short term or long term. Sometimes short term trends are difficult establish. Long term trends are always more accurate.
5. The objective of trading shall be such that it should continue to endure beating ups and downs of the market. The risk capital allocation should not be more than 2-3% so that even if end in making consecutive losses in successive trading sessions.
Reading a forex price quote
A foreign exchange quote is simply the price at which the trading would have occurred or would be occurring. It is expressed as ratio between the value of currencies and they are also called “currency pair”. The numerator is the base currency and the denominator is the traded currency. There is a bid price at which you would bid and there is an ask price at which the currency is offered to you. The difference between the bid price and the ask price is known as spread the currency. The spread affects trading of foreign exchange.
While forex trading is supposed to be less risky than equity and commodities trading, still the associated market risks needs thorough knowledge of principles and management acumen. Since trading occurs all through the day, the opportunities exist for traders to make money.