How does forex trading work?
Forex trading operates based on the movement in currency values within a paired structure. Market participants engage in trading contracts that reflect the relative strength of one currency against another. These contracts are executed via platforms and exchanges regulated by SEBI in India. Here are the key components involved in the trading process:
Currency pairs
Forex transactions involve two currencies quoted as a pair (e.g., USD/INR). One currency is used to determine the value of the other. Prices reflect the market’s perception of relative currency strength.
Bid and ask price
These are two prices shown for each currency pair. The bid is what one can receive, while the ask is what one needs to provide. The gap between them, called the spread, affects trade costs.
Leverage
Leverage allows a trader to control larger contract values with a smaller margin amount. It increases exposure but also the associated risk, and is capped on Indian exchanges to protect retail participants.
Going long and going short
In trading terms, taking a long position reflects an expectation of price appreciation, while taking a short position reflects an expectation of price decline. These positions help align trading objectives with market views.
Fundamental and technical analysis
Fundamental analysis evaluates macroeconomic factors such as GDP, inflation, and interest rates. Technical analysis studies price patterns, trends, and chart indicators to anticipate future price movement.
Placing orders
Orders like market, limit, and stop-loss define the conditions under which a position is initiated or closed. These instructions help manage timing, price, and risk efficiently on a trading platform.
Profit and loss
The difference between the opening and closing value of a position determines the outcome. This result, when adjusted for lot size and charges, reflects the gain or loss on the trade.
Market liquidity
Liquidity indicates how quickly a position can be exited without affecting the price significantly. Higher liquidity means efficient execution, especially in major currency pairs.
Risk management
Risk control involves setting exposure limits, using stop-loss levels, and avoiding over-leveraging. These practices help minimise losses in volatile conditions and preserve trading capital.
Continuous market operations
The global forex market functions 24 hours a day during weekdays, allowing participants to react promptly to international events across financial centres in Asia, Europe, and the Americas.
Types of forex market
The forex market includes multiple segments, each with its structure and trading mechanism. These segments offer flexibility depending on the participant's needs and objectives.
Type of Forex Market
| Description
|
Spot Market
| Currency exchanged based on current market rates
|
Forward Market
| Private contracts to exchange currencies at a predetermined rate on a future date
|
Futures Market
| Standardised contracts on exchanges for future currency exchange
|
Options Market
| Provides the right (but not the obligation) to exchange currencies at a set rate
|
Swap Market
| Involves simultaneous borrowing and return of currencies
|
Interbank Market
| Direct currency trading among banks and large institutions
|
Retail Forex Market
| Individuals access currency markets via brokers or platforms
|
Central Bank Market
| Currency operations conducted by central banks to regulate reserves
|
Commercial Forex Market
| Corporates manage currency exposure for trade or foreign payments
|
Non-Deliverable Forward (NDF)
| Contracts settled in local currency without actual currency delivery
|
Exchange-Traded Currency Derivatives
| Traded on NSE or BSE with regulatory supervision
|
Cross-Currency Market
| Currency pairs excluding INR, generally used for indirect exposure
|
Why is Forex Trading ?
Forex trading allows Indian participants to manage international exposure, diversify financial portfolios, or take advantage of exchange rate shifts within a regulated structure. Its relevance stems from its alignment with global and domestic financial activity.
Portfolio diversification
Engaging in forex contracts helps spread risk across different asset classes and markets. It offers exposure beyond equity and fixed income, enhancing overall financial stability.
Hedging currency risk
Exporters, importers, and firms with foreign payments use forex instruments to safeguard margins by neutralising the impact of currency movement.
Profit from currency fluctuations
By participating in price movements, traders may benefit from directional changes in currency values, provided proper risk management is in place.
Round-the-clock market
Forex markets are operational throughout the working week across time zones, allowing flexibility in participation and continuous global market access.
Who Regulates Forex Trading in India?
In India, regulation of forex trading is done by several key institutions to ensure legal compliance and prevent fraud. The primary regulator is the Reserve Bank of India (RBI), which oversees all financial transactions, including those in the forex market. RBI sets strict guidelines regarding permissible currency pairs, limiting forex trading to only INR (Indian Rupee) paired with other currencies.
Additionally, the Securities and Exchange Board of India (SEBI) plays a significant role in regulating entities that facilitate forex trading platforms in India. SEBI ensures that these platforms adhere to the required standards and operate under legal frameworks. Only registered brokers under SEBI are allowed to provide currency trading services.
Furthermore, the Foreign Exchange Management Act (FEMA), of 1999 governs all foreign exchange-related activities in India, laying down rules for individuals and businesses engaging in forex transactions. This multi-layered regulatory framework ensures that forex trading in India remains within legal and ethical boundaries, addressing the most major pertinent concern: Is forex trading legal in India?
Additional Read: Difference Between FERA and FEMA
How to Start Forex Trading in India?
Individuals in India can participate in forex trading through currency derivatives on recognised stock exchanges. The process is structured and regulated under RBI and SEBI guidelines.
Open a trading and demat account
Register with a SEBI-approved broker offering currency derivative services. Complete your KYC verification and link your bank account for settlements.
Understand the regulatory framework
Only exchange-traded currency pairs like USD/INR, EUR/INR, GBP/INR, and JPY/INR are permitted. Offshore forex platforms are not allowed for residents.
Select a currency pair
Start with commonly traded pairs such as USD/INR, which offer high liquidity and better pricing due to volume.
Use a demo account
Practice on demo platforms to learn order placement, chart reading, and risk control techniques without financial exposure.
Execute a real trade
After learning the basics and strategy application, initiate a position through the broker’s trading terminal using margin, stop-loss, and other tools.
Pros & Cons of Forex Trading in India
Forex trading in India offers both opportunities and challenges, depending on the trader's experience and understanding of the market.
Pros
| Cons
|
High Liquidity: The forex trading market operates 24/7, providing high liquidity, allowing traders to easily buy and sell currency pairs.
| High Risk: Forex trading involves significant risk, especially for beginners, as price fluctuations can lead to substantial losses.
|
Diverse Currency Pairs: Traders can choose from a wide variety of currency pairs, offering numerous opportunities for profit.
| Regulatory Restrictions: In India, currency trading is heavily regulated, and trading is only allowed in INR-based pairs through authorized brokers.
|
Potential for High Returns: With the right strategy and knowledge, forex trading can offer the potential for significant returns.
| Complex Market: The forex market is complex and affected by numerous global factors, requiring traders to stay informed constantly.
|
Ultimately, understanding both the advantages and limitations of forex trading is essential for anyone looking to enter this dynamic market in India.
Forex trading strategies
Various strategies are used depending on the trader’s time commitment and market outlook. These approaches help streamline decisions and manage risk more effectively.
Scalping
A strategy involving rapid entry and exit from positions within minutes. It aims to capture small price movements multiple times in a day.
Day trading
This approach involves initiating and closing all positions within a single trading session to avoid overnight exposure.
Swing trading
Traders use this strategy to identify and act on short- to medium-term trends, holding positions for days or weeks.
Position trading
Involves long-term holding based on broader macroeconomic trends. This approach is suited for investors with a patient outlook and minimal monitoring needs.
Indian Forex Trading
If you wish to trade in forex in India, you have to get in touch with a broker that is spread internationally as the markets operate across locations like the U.S., London, Singapore and Tokyo.
Other than that, you need to open a currency trading account. There is a procedure that needs to be followed in order to proceed with that.
- Firstly, you need to open a trading account with a broker that has a proven track record of being one of the best in the market for trading.
- The KYC process has to be completed to activate the account. For this, you may have to submit some specific documents and information regarding yourself.
- There’s a certain amount of margin required for you to start trading . Your broker will inform you about the same after which you can deposit the amount and start trading.
- Lastly, you would require the necessary access credentials which will be provided by your broker.
Few tips for Forex Trading
To ease your forex trading, here are a few tips listed which will enable you to make informed decisions and wise choices while investing with foreign exchange.
Have thorough knowledge of the markets:
We cannot stress enough the importance of educating yourself on the forex market. It’s imperative that you take time to study the currency pairs and understand what affects them before you risk your capital.Identify your investment goals:
Your investment goals should always be in sight. It could be anything from long-term to short-term goals. Depending on the timeframe you have assigned to yourself for meeting these goals, you can identify the best strategy that will be in sync with your investment goals so that your goals are met.Be aware of your limits:
Other than having a strategy, to gain success in forex trading, you need to mark out your own limits. It is very critical for your trading prospects. This includes things like how much you are willing to risk on each trade, identifying in advance the point from which you’ll withdraw from trade, and not risking more than you can afford to lose.
Different people have different approaches to forex trading. Knowing the market and keeping a tab on the current affairs around the world help in a big way to gain success in a volatile market like forex. Hence, it is important to ensure you are well-equipped before you decide to start forex trading.
Investments in securities market are subject to market risk, read all the related documents carefully before investing
Forex trading terms to know
Understanding key terms helps navigate the trading environment efficiently and enables better communication with platforms and brokers.
Pip (Price Interest Point)
It measures the smallest change in currency value, typically four decimal places. It is used to calculate gains or losses on trades.
Spread
The difference between the two quoted prices in a currency pair. It reflects the cost of entering and exiting the market.
Lot size
The volume or unit size of a contract. Indian exchanges offer standard lot sizes such as 1,000 units for USD/INR.
Margin
The required collateral to initiate a position. It ensures that traders have enough funds to cover potential market moves.
Stop-loss order
A risk management tool that automatically closes a position once the price reaches a predefined level to limit further loss.
Conclusion
Forex trading offers Indian investors structured exposure to global currency movements while maintaining compliance with domestic regulations. It serves multiple purposes, from risk mitigation to strategic diversification. Participating in this market requires a clear understanding of its mechanisms, instruments, and obligations. Traders must adhere to regulatory frameworks, use approved platforms, and employ proper risk management techniques. Whether the goal is to manage forex exposure or explore currency trends for potential returns, success depends on education, discipline, and responsible trading habits.