How To Trade in Currency in Indian Stock Market in 2024

Venture into the thrilling world of currency trading! Now, with a more globalised economy, the foreign exchange market, or Forex market, grows in popularity amongst traders and investors. The forex market boasts a daily trading volume of $6 trillion, making it the biggest and most liquid financial market on the planet.

Currency trading involves buying and selling various currencies to realise profits available from currency rate fluctuations. It entails a high degree of volatility with the possibility of large gains but small losses. In currency trading, one needs to have a complete knowledge of the market structure, the mechanism of trading, and the strategies involved in order to make a profit.

With that, let’s get started with the first important concept or idea in the currency trading domain. 

Understanding the Forex Market (Market Structure, Major Currency Pairs)

As a preliminary step toward a more in-depth discussion about foreign exchange, you should be familiar with the particular market in which trade is carried out among countries. Forex is a 24/7, worldwide market which facilitates the buying and selling of currencies involving just two institutions or thousands of accounts. We also need to look at market structure and the different major pairs of currencies.

• Market Structure:

The forex market is constructed from a network of individuals ranging from banks to financial institutions, brokers, and traders. The forex market does not have a central exchange like the stock market. Alternatively, trades are completed off-the-screen (OTC), through the computer network.

The forex market operates 24 hours a day, five days a week, across different time zones. The market opens on Monday morning in Sydney, Australia, and closes on Friday evening in New York, United States. This continuous operation allows traders to participate in the market at any time, regardless of their location.

The forex market is divided into three main sessions:

• Asian session
• European session
• North American session

• Major Currency Pairs:

In the forex trade, currencies are traded in pairs, signifying the exchange rate between two particular currencies. The currency that is placed in the first position of the pair is known as the base currency, while the other one, which is in the second position of the pair, is called the quote currency.

The major currency pairs, which account for a significant portion of forex trading volume, include:

1. EUR/USD (Euro/US Dollar)
2. USD/JPY (US Dollar/Japanese Yen)
3. GBP/USD (British Pound/US Dollar)
4. USD/CHF (US Dollar/Swiss Franc)
5. AUD/USD (Australian Dollar/US Dollar)
6. USD/CAD (US Dollar/Canadian Dollar)
7. NZD/USD (New Zealand Dollar/US Dollar)

These most-traded currency pairs are known for having wide liquidities, which refer to ease and speed of transactions without notable impact on their exchange rates. They also possess small spreads which are prices with the significant difference between buying and selling, and thus the solution with larger profit is obvious.

Besides the most liquid currency pairs, including the US dollar there are also the minor currency pairs that derive from other currencies besides the USD, and the exotic currency pairs that result from emerging market currencies.

Basics of Currency Trading 

Next, as you have learned some specifics about the structure of the global forex market, about the most frequently traded currencies, and about the participants in the foreign exchange market, let's move on to how forex trading works. Forex trading entails the sale of one currency against another, which again needs to be brought back, and the profit made goes in the form of the difference in rates of exchange.

• Spot Transactions:

Generally, the most frequently occurring transfer of currencies is spot transactions. Spot trades are currency transactions made at the current market rate; the exchange of currencies (instant or within 2 business days) happens simultaneously or shortly after the transaction. Spot transactions are the pillar of the central currency market and it involves massive numbers as the major part of forex trading.

• Forward Transactions:

The other form of currency investing is known as a forward transaction. In a forward deal, you carry out a buy or sell transaction at a fixed price in relation to a forthcoming, pre-established date. The forward transactions can frequently be applied in this regard to control account risks such as currency swings.

• Trading Orders:

Currency trading is flexible, and you can select various orders to enter or exit a market position. The most common types of orders include:

1. Market Order: A market order or "market execute" is an instruction to buy or sell any currency pair at the current market price. It processes things as quickly as they occur in the markets and instantly converts your buy limit order into a purchase. However, it does not guarantee the price at which the trade will be executed.
2. Limit Order: A limit ticket is a command to buy or sell currency pair at a certain price (lower) or better. It is where you have the chance to set the price and execute the trade but not specifically guarantee that at the mentioned price your order will be filled if the market won't reach it.
3. Stop Order: A one stop order, often called a stop -loss order, is a certain order to buy or sell the currency pair when the price is at a specific level. It is employed to prevent the downside impairment or reposition in the event the market moves with a certain direction.

• Bid and Ask Prices:

In the forex market, each currency pair has two prices: the bid price and the ask price. The bid price is the price at which you can sell the base currency, while the ask price is the price at which you can buy the base currency. The difference between the bid and ask prices is called the spread, which represents the cost of trading and the profit margin for the broker.

• Pips:

Currencies are typically quoted to four decimal places, and the smallest increment of price movement is called a pip (percentage in point). For most currency pairs, a pip represents a change of 0.0001 in the exchange rate. However, for currency pairs involving the Japanese Yen (JPY), a pip represents a change of 0.01.

• Lot Sizes:

In currency trading, positions are measured in lots. A standard lot is 100,000 units of the base currency, a mini lot is 10,000 units, and a micro lot is 1,000 units. Some brokers also offer nano lots, which are 100 units of the base currency. The lot size determines the size of your position and the potential profit or loss from your trades.

Trading Platforms

Being able to trade currency online is made possible by having a secure and simple to use trading platform. A trading platform is a software which captures the market and allows you to conduct trades, manage your positions as well as implement the trading strategies. Now, look at the specifics of platform currency trading most used.

• Proprietary Platforms:

Almost all forex brokers develop their own platforms, which are proprietary, and are projected to meet their unique customers. The platforms might deliver some special features, add-ons, tools or trading terms, which may differ them from standard platforms like MT4 and cTrader.

• Web-based Platforms:

Some brokers offer clients a web-based trading platform that makes it possible to reach the market on-line through the web browser without having to install any files beforehand. The platforms are convenient and easy to use, although they may be lacking in certain features that give a desktop more functionality.

In the next section, we'll introduce you to some basic trading strategies that you can apply in the currency markets.

Basic Trading Strategies 

Having a well-defined trade strategy is a very important requirement for building the currency market as a successful investor. A trading strategy is an organised way to make systematic and responsible decisions, manage risk, and strive for profit maximisation. Shall we discuss a few strategies of currency trading that you can use on your trading journey if you are a beginner?

• Trend Trading: 

Trend trading implies the process of defining the overall market direction (taking long positions in an uptrend, taking short positions in a downtrend or holding positions in a flat market). "Riding the trend" is the expression for holding the positions until the evident indications of trend turning appear. Traders looking at trends establish moving averages, trendlines, and price action patterns as their tools to identify and confirm trends.

Example: A trend trader interested in the EUR/USD pair would go long, placing a buy trade and staying in the position as long as the trend is intact and displays no signs of exhaustion or reversal.

• Range Trading: 

Range trading is a technique applied during irregularity periods or when the market is in expansion or in a state of consolidation. Those range traders buy close to the low end and sell close to the high end, capitalising on the fluctuations created by the price oscillations. They use tools such as Providing support and resistance areas, different oscillators, and chart patterns to find the extent of ranges at the end of the day.

Example: With the GBP/USD pair being traded within a clearly defined range, a trader using a range strategy would typically buy around the support level and later short positions near the resistance level, expecting the price to oscillate within those levels.

• Breakout Trading: 

Breakout trading means getting into a trade when price breaks through the pivotal level of support or pent up asset at the critical point and expecting the move to continue in the same direction. In order to confirm a breakout, in most cases, a typical breakout trader is likely to be using volatility indicators, volume analysis and price action patterns.

Example: A trader using the breakout strategy would acquire the pair when the USD/JPY crosses that meaningful resistance strong and with plenty of momentum trying to assume that the price will continue moving upward.

• Position Trading: 

Position trade is a very successful strategy that involves holding for weeks, months, and even years which determine your role in the market. Position traders predominantly look for fundamental values, hands-on macroeconomic analysis, and long-term patterns to find trading opportunities. They tend to focus on larger price movements and may, in some cases, utilise a widespread stop-loss order and take-profit levels.

Example: An analogy of a similar event would be if a position trader believes the Australian economy is doing better than the US over the next 12 months and then buys into the AUD/USD pair hoping to hold a position for a long time, targeting long-term awareness of the Australian Dollar.

Keep in mind that the trading strategies mentioned above are just a few examples from a rather large set. As you get the hang of the game and acquire more skills, you can transform that into your own strategy by employing the one that fits your trading style, risk tolerance, and comprehension of the market.

Risk Management

You can come up with the best trading strategy you could possibly think of, but you won't be able to survive in currency trading without good risk management skills. This is because risk management is essential to protect your capital as you trade. Risk management is about finding the risks, figuring out how terrible these risks may be, and determining ways to limit them.

Here are some key principles of risk management:

1. Position Sizing: Establish the appropriate position size for all trades, by multiplying the expected trade size by your account balance/ risk tolerance. The rule of thumb recommends that the losses from one position should not exceed 1% - 2% of the total amount of money you have invested in the account.
2. Stop-Loss Orders: Very often, stop-loss orders form the most effective and rational means of protecting a trader; it is always a good practice to include those in your trading plan. Put your stop-loss reading at the level that suits your risk aptitude as well as your market predictions.
3. Diversification: Diversify the risk in fold by employing various currency pairs and approaches of trading. Do not get bogged down in overweighting your positions on a single pair or strategy, instead find a diversified portfolio.
4. Risk-Reward Ratio: Target trades that have a reward to risk ratio of at least two or more, with the minimum winning target being at least twice the maximum loss. Thus bringing into confidence the notion that your profiting trade outweighs your losing one.
5. Emotional Control: Keep up your composure as well as follow the trade plan you have developed. Do not make snap judgments out of fear, greed, or other hormonal stimuli which can cloud your judgement.

Remember, risk management is an ongoing process that requires continuous monitoring and adjustment as market conditions change.

Bottom Line

In this chapter, we have delved into the characteristically intriguing landscape of currency trading. In the course of your trading with currency, always make sure to keep yourself updated and abreast with the latest market occurrences, adopt new approaches if important. This process requires being devoted, disciplined, and an ability to learn as you will trade in the tricking world of currency and, possibly, achieve your financial aim.