These days we find a lot of people venturing into trading with the goal of making a lot of money in a short duration of time. Trading is done in equities, currency and so on. All these asset classes offer high returns from trading but are at the same time highly risky and there are chances of incurring losses as well. The idea is to find out a rather low risk instrument to trade and focus only on it. That is where currency trading comes to the fore.
Currency is the largest traded instrument globally. Thanks to the high liquidity in the currency market, one can enter and exit positions with ease and the market is open round the clock during weekdays. It is impossible to completely eliminate risk even in currency trading. However, one has the opportunity to make profits from small fluctuations in currency pairs.
Currency trading started in India in 2008 while options on currencies were made available from the year 2010. National Stock Exchange Ltd and Multi Commodity Exchange provide the platforms for currency trading in India. One can participate in this market through member brokers. Trading can be carried out over the internet or mobile phone.
Two currencies are traded as a pair. In our country the Indian rupee is paired with fours currencies namely the USD-INR (US dollar), Eur-INR (Euro), JPY-INR (Japanese Yen) and GBP-INR (Great Britain Pound). Apart from individuals, big firms such as banks financial institutions, government, the Central Bank and small investors apart from speculators are active in currency market.
Currency rates may be determined by several factors including the country’s rate of economic growth, changes in interest rates, budget, deficits, undercurrents in the global economy and so on. These factors have an impact on the movement in currency pairs. The goal is to profit from these movements.
There are certain basic concepts to be understood before venturing into trading. For example let us consider the pair USD-INR. Trading is done in lots and one lot of USD_INR contract means thousand US dollars. Therefore one needs to know the exchange rate since the contract value is arrived at based on that. The tick movement in this contract is 0.25 paisa or 0.0025 rupees.
One paisa movement equals Rs 10 per lot
Let us say that a trader’s view is that the rupee will weaken. In this scenario he will buy dollars since a weakening rupee translates into a stronger dollar. Similarly, if the view is bullish on the rupee then one should sell the dollar. A one paisa movement in the rupee translates into Rs 10 movement per contract.
If a trader is long the dollar and the rupee falls by 10 paisa, his profit per lot will be Rs 10. Now, if the rupee falls further, say 50 paisa, his profit will be Rs 500 per lot. The exchange rate as on date is Rs 66.51 as against a dollar. And this rate multiplied by 1000 represents the contract value. Transactions may be carried out for as low as 5% of the contract value as margin money.