India’s foreign exchange market is relatively new, starting only three decades ago back in 1978, when the government allowed banks to trade foreign exchange with one another. 70% of today’s FX activity in the country takes place in the inter-bank market, which consists of more than 90 authorised dealers. Trading is regulated by the Foreign Exchange Dealers Association of India (FEDAI), a self-regulatory association of dealers. You can check out their website at https://fedai.org.in/.
The liberalization process has significantly boosted the foreign exchange market in the country by allowing both banks and corporations greater flexibility in holding and trading foreign currencies. But now, even individual traders are becoming interested in FX trading in India, owing to the proliferation of internet technology in the country.
Things you need to know when trading forex in India
The main FX governing body in addition to the one above is the Securities and Exchange Board of India(SEBI), while directives are also enforced by the Reserve Bank of India.
- The INR’s demand is affected greatly by the import of foreign goods, which strengthens it.
- The INR’s value is further dependent on the amount of foreign capital inflow into India. The interest rates on Indian government bonds can mostly cover foreign market risks.
- The INR’s value suffers a setback with an increase in inflation.
- The Reserve Bank of India intervenes from time to time, particularly when there a high degree of volatility in INR-USD rates.
- Traders based in India can only access currency pairs when it is paired with the INR. These include four currencies: the Japanese Yen, The Great Britan Pound, The Euro and the United States Dollar.
- The rules have been somewhat relaxed to allow the introduction of three new currency pairs, particularly: the EUR-USD, GBP-USD and USD-JPY.
- Indian traders are general advised to access only those brokers which are regulated by the SEBI.
- SEBI does not enforce any limitations on margin and leverage on their brokers you need to be careful while trading FX from the country.
Calculating earnings in FX market
To learn how to accurately calculate earnings in the forex market, you have to first calculate the profit and loss of a position. For this, you need to know the position size and the number of pips. A pip(percentage of profit) is a representation of a small change in the price of a currency pair. It is a standardized unit which is the smallest amount that a currency quote changes. The final profit or less will be equal to the pip movement multiplied by the position size.
As a rule of thumb,
- Forex Profit and Loss Long Trade = (Closing Price – Opening Price) * Conversion Factor * Trade Size
- Forex Profit and Loss Short Trade = (Opening Price – Closing Price) * Conversion Factor * Trade Size
To understand how profit and loss are calculated for long and short trades, take a look at some of the examples.
Example #1
Long trade on 100,000 EUR-JPY at 88.200
U.S. Dollar Native Account Currency
The above position is closed at: 88.350
- (Closing Price – Opening Price): 88.350 – 88.200 = .150 (Profit)
- (Profit X Conversion Factor): .150 X .01145 = 0.0017175 (Conversion Profit)
- (Conversion Profit * Trade Size): 0.0017175 X 100,000 = $171.75 (Total Profit)
Example #2
Short trade on 100,000 USD-JPY at 89.200
U.S. Dollar Native Account Currency
The above position is closed at: 89.550
- (Opening Price – Closing Price): 89.200 – 89.550 = – .350 (Loss)
- (Loss X Conversion Factor): -.350 X .01145 = -0.0040075 (Conversion Loss)
- (Conversion Loss * Trade Size): -0.0040075 X 100,000 = -$400.75 (Total Loss)
Now many traders in India often asked the question “do we earn in dollars in forex trading India?”. The simple answer is no.
- Since it’s illegal under the existing legal framework for any Indian citizen to send INR outside of the country for forex trading, there are many international brokers which have introduced local deposit methods to ease the deposit process for Indians.
- That means that the earnings calculated above would depend on the type of account chosen. Because most brokers do not provide INR as a base currency, you will have to open one in either EUR or USD. Whatever you earn in that account will be in terms of the base currency.
- To get your profits, your funds will have to be converted to INR, in which case you will incur additional fees.
- INR as a base currency is very rare among international brokers, which mainly offer account currencies in USD, GBP, USD and EUR.
The most commonly traded currencies in the FX market
Before we list the most commonly traded currencies in the forex market, we should first look at how currencies can be classified. Individual currencies can be categorised into two groups: Developed Markets (DM) from Emerging Markets (EM). Currencies in the developed markets are from the G7 or G10 countries which include: USD, AUD, CHF, EUR, NZD, SEK, JPY, CAD, NOK, GBP and DKK.
Since the EUR/USD pair is the most traded currency pair, it goes without saying that both the Euro and the U.S. Dollar are among the most traded individual currencies. If we examine the individual currencies carefully, we will see that there are 5 currencies that are traded the most globally: The Euro, The Japanese Yen, The Great British Pound, The Australian Dollar and the U.S. Dollar.
The Euro (EUR)
The Euro is the second most traded currency in the world. The European Central Bank issues the currency, which is the official legal tender of exchange for 19 European countries. Nicknamed the fiber, the currency is featured in the EUR/USD pair and is most active during the New York and London trading sessions.
The Japanese Yen (JPY)
With a daily average volume of over $550 million, The Japanese Yen makes up almost 4.9% of global currency reserves. The currency is most active during the New York and Asian sessions. Many traders consider the Yen as a safe haven due to the country’s low-interest rate, high trade surplus and low debt, all of which makes it a stable economy. A very popular way to trade the Yen is through carry trading, where the investors borrow the currency at lower interest rates and reinvest it in higher-yielding foreign currencies.
The U.S. Dollar(USD)
Nicknamed the Greenback, the U.S. Dollar is the most traded currency in the world. Issued by the Federal Reserve, it is also the top global reserve currency, being held by the central and smaller banks of many nations. Being backed by the world’s largest economy, the value of this currency depends heavily on domestic economic performance. It is also the most common currency accepted as base currency for online brokers. Additionally, some U.S. territories and sovereign nations use the USD as their official currency. You can find the list at https://www.investopedia.com/articles/forex/040915/countries-use-us-dollar.asp
Australian Dollar (AUD)
Nicknamed the “Aussie”, the Australian Dollar replaced the Australian pound in 1966 as the country’s official currency. It is the fifth most traded currency in the world and is used by a number of Australian territories and Pacific Island nations. Known primarily as a commodity currency, it has reached this status because of Australia’s position as a major exporter of commodities.
Great Britain Pound( GBP)
The Great Britain Pound, also known as the “Cable” is one of the oldest surviving independent currency and is issued by the Bank of England. It is also another major global currency reserve. It is most actively traded during the New York and London trading sessions.
Final Thoughts
The above currencies featured are some of the most traded currency pairs in the world. Whatever currency you are trading, always make sure that you’re choosing the most liquid market available, which will allow you to manage risk effectively. Also as an Indian trader, you must conduct proper research regarding the rules and regulations of forex trading in your country before you venture to open a brokerage account.