If you thought equity or the commodity markets were big, wait till you learn about the currency markets also called as the Forex markets. The daily transaction in the currency markets is to the tune of $5 trillion. It dwarfs all the other markets in comparison. All the major banks in the world, the exporters and importers, large hedge funds and the traders are involved in the currency markets. It’s an excellent opportunity for the individual trader to profit from trading in Forex.
Unlike the stocks or commodities, the currency markets are traded in pairs. The quotation always includes a pair and the bid/ask price. For a newcomer reading the quote itself becomes very confusing because of the two currencies denoted in the quote. A sample quote is given below
USD/INR = 66.3825/50
Here, USD or the US Dollar is called as the Base currency
INR or the Indian Rupee is called as the quote currency
66.3825 is the Bid price
66.3850 is the Ask price
The spread between the two is 0.0025
66.3825 is the amount of Rupees required to buy one US dollar
Among all the currency trading in the world, four pairs corner the largest market share. They are called as the Majors. These pairs and their nicknames according to Investopedia are:
There are four major currency markets in the world. The undisputed leader in Forex trading is London, also called as the financial capital of the world. It’s share is almost 40%. The New York city is at the second place with almost 20% market share. Third and fourth position are a close call and these positions keep changing between Singapore and Tokyo.
The US dollar is the most traded currency in the world, followed by the Euro and the Japanese Yen. The most traded currency pair is the EUR/USD. The majors along with the commodity pairs account for almost 85% of the total trading in the Forex markets. A total of 18 pairs are actively traded in the currency markets.
Currency trading in India is limited to only a few pairs and with local currency only. The pairs that can be traded in India and their units are
Traders can participate in only the above mentioned four pairs. The minimum tick size is 0.25 paise and the trading settlement is done on last working day of the expiry month, barring Saturdays. The settlement is done in cash and the Final Settlement price is the RBI reference rate. Trading hours for trading are from 9:00 a.m. to 5:00 p.m. on Monday to Friday.
There are a few exchanges in India which offer currency trading. The most famous among them are the National Stock Exchange and the Metropolitan Stock Exchange of India formerly known as the MCX Stock Exchange and the United Stock Exchange of India.
The currency markets carry a lot of leverage, due to the record number of transactions that take place, and due to low volatility in the currency pairs, compared to stocks or commodities. It is not uncommon to trade with leverages of 1:50 to 1:200 or more while trading in the Forex markets. Even in India, the margin money required to trade in the currency pairs is very less. A margin of less than Rs.2000 is needed for the USD/INR and the JPY/INR and other two pairs require margins of less than Rs.3000 to trade in them.
With such high amounts of leverage, it’s very easy for the individual investor to get carried away and hold extremely large positions. High leverage is like a double-edged sword, which can swing either side. Traders should be careful while trading with such high leverage.
Individual traders, exporters and importers, Foreign Institutional Investors, Hedge funds, Banks and all companies which are dependent on flows from abroad, participate in the Forex markets.
The currency markets closely follow the overall economic condition of a Country. Each and every policy decision by the government, which are economically important, have an effect on the currency markets. If the government runs a deficit, it adversely affects its currency. Various global factors also affect the movement of the currencies.
The currency markets are a great way for the individual investor to participate in the Forex markets and profit from it. Due to the high leverage offered in the markets, the trader should be careful while taking positions. A clear understanding of the local and the world economy and chart reading can be useful for the Forex traders.