The Ultimate Guide to Forex Trading

A Forex Trading scenario:

An Indian company is involved in a considerable amount of business in Singapore. Naturally, a lot of their transactions will take place in Singapore dollars. But the Indian company would hedge against a fall in the relative value of the Singapore dollar.

What do they do?

They buy the Currency pair INR/SGD (Indian Rupee vs. Singapore dollar).

But first, let’s understand Forex trading and how Forex trading work.

What is Forex Trading?

Forex trading or forex exchange is the exchange of one currency for another. This exchange takes place at an agreed rate which is known as the exchange rate. 

Foreign Exchange Market is a global marketplace where currency exchange takes place and it is open 24*7.

How are currencies traded?

A three-letter code is attributed to each currency while trading. For example, the U.S. dollar is marked as USD.

Forex trading is expressed in a combination that involves two currencies that are being traded. For example,

EUR/USD

This means buying Euros and selling US Dollars.

What is Base and Quote Currency?

A Forex trade involves a pair of currencies. It involves a currency that is being sold in order to buy another currency.

So in the case of EUR/USD, EUR is the base currency and USD is the quote currency.

This further means that if EUR/USD is trading at 1.4678 then one Euro is worth 1.4678 dollars.

What are the different types of Forex Market?

Other than for the purpose of exchanging currencies, Forex Trading also takes place to determine the future price of currencies. So Forex traders often trade off low-value currencies with currencies whose value they think might increase.

There are 3 types of markets where Forex can be traded:

The Spot market: The Forex pairs are swapped and exchanged in real-time. This is the primary market where the exchange takes place based on supply and demand.

The Forward market: Forex traders can fix the exchange rates for an agreed-upon amount of currency for a future date. It is like a private contract.

The Futures Market: This involves a standardised contract for traders so that they can buy or sell a specific amount of currency at an agreed-upon exchange rate at a future date.

The exchange rates of forward and futures markets are speculated by the scenario in the spot market which is the primary forex market where the majority of the trades take place.

Forex Trading Glossary:

How does Forex Trading work?

Forex trading can be performed in multiple different ways. But what’s the basic rule?

You buy one currency and sell another currency. This exchange happens simultaneously. Forex transactions can be performed by a broker or via an online trading platform.

There are certain derivatives that are leveraged products. This will enable you to take a position on market predictions i.e whether you think the market will fall or rise in value. You can do this without taking any ownership of assets.

As good as it sounds, leveraged products can also be responsible for your losses depending on the market movements.

Top tips for successful forex trading in India:

1. The right broker will never break your trust! 

The most important step to successful forex trading is to select a trustworthy broker who has been authorised by SEBI. Your broker should provide you with high leverage ratios, lower spread and brokerage charges.

2. What’s your game plan? Strategy

Forex trading demands a strategy. A strategy that clears out your end goals via the trading session, your profit goals, and ideas about your stop-loss. It is also essential to have a clear idea of your risk tolerance levels.

3. Market weather prediction:

The Forex market is volatile. Observing the market before investing is an essential step for successful forex trading especially if you are new. The Forex market is prone to fluctuations based on geopolitical tensions and other factors.

4. Start small and slow:

One of the most important steps to start forex trading is to start small. Smaller investments allow you to realise your risk appetite.  While you invest it is essential for you to understand the leverage, leverage ratio, and market movement, determining your stop-loss/profits.

5. Stop-Loss:

Stop-loss is the most important element of Forex Trading. Being a trader would invite a number of times when you might have made wrong decisions but how will you protect all your money?

Enter Stop-Loss.

Mr Bajaj decides to become rich by intraday trading in the GBP/INR futures. He decides to buy 13 lots against Rs 10,000 straight into his trading account. He gets a leverage of 123 times. But he notices that the GBP/INR starts depreciating, and he worries about losing his money.

Now, Mr Bajaj is left with 2 options:

• Have patience and pray!
• Put a stop-loss and book losses

If Mr Bajaj went with the first option, he would have lost almost all his money by the end of the trade as the GBP/INR fell 0.73 paise in the day. So, he would have lost his whole capital.

But Mr Bajaj being a smart forex trader decides on putting a stop loss at 94.70. This helped him cut his loss to Rs 1,657 instead of losing the entire Rs 10,000.

Foreign Exchange management techniques for your business:

The main roadblock to successful overseas business operations is a lack of awareness and constant fluctuations in currency values. Proper foreign exchange management techniques can be very helpful to ensure the business is on the track. Here are a few steps that may lead an enterprise that way.

1. Approach a bank suitable for your business

This is the foremost step in bringing your Forex management on track. Although banks might offer similar services, it is always advised to compare rates with the mid-market rate which is also known as the actual exchange rate. this will be easily available on the internet.

Next is the commission fee. Never get deceived by the commission fee charged by banks. Though many banks offer a 0% fee, it is not practical and one should understand that the fee may be in some other hidden form in such cases.

Although usually, you can find that the banks operating online and having a transparent rate sheet are trustworthy, as they do not try to manipulate the customers.

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2. Focus on the Forex provider

While there are many Forex providers offering a myriad of services, one should be careful in choosing them according to the nature of their business transactions.

Eg: it would not be so beneficial to choose a Forex provider with a better price, but supports only a few currencies if your Forex transactions are from all around the globe.

3. Know where your money is going

Focus on the below factors to have a fair idea of what you are paying for:

• Dumping: This is the most commonly used deceptive technique in the Forex market where they lure customers initially by offering unimaginably low rates and then they start charging additional costs on future transactions without any intimation.
• Selective Exchange Rate Adjustment: It is obvious for the service providers (banks, FX providers) to find opportunities to benefit from the market conditions, but transfer the potential losses to the customers. In the highly volatile foreign exchange market with the exchange rates updating almost constantly, there will be cases where the updated exchange rate can either benefit the bank from the agreed exchange rate or in some cases, can also be a loss factor for them. 
• Spread: Spread is the difference between the exchange rate offered by the bank and the real exchange rate or the mid-market rate. Thanks to the continuously upgrading technology, now the mid-market rates are easily available to everyone on the internet, which was not used to be the case earlier.

Hence, it is not easy nowadays for banks or brokers to take advantage of the spread.

4. Maintain an account in the main currency

The main currency is usually the currency in which the majority of the transactions occur. In many ways, it is beneficial to maintain an account in the main currency.

With most of the transactions occurring in the main currency, this account prevents loss in the form of spread and protects the firm’s revenue from the volatile currency exchange rates. Also, one can always take credit in the main currency by maintaining a bank account operating in that currency. This also saves time by avoiding unnecessary intermediary steps like currency conversion and transfer.

5. Know better about the currencies

The focus on international transactions should be on saving as much as you can from the charges like spread. Hence, major currencies are always a better bet. These major currencies like USD, EUR, and GBP are traded in mass and have high liquidity with low spread.

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6. Risk is inevitable, but can be covered through Hedging

Business is always prone to financial risks. International trade is no exception. Highly volatile foreign exchange rates demand hedging of the same. Hedging is a process of minimising risk by using financial instruments like future, forwards, options and swaps.

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