Beginners Guide
Introduction
Whenever someone from India goes abroad, he needs to carry some currency accepted in
the destination country so that he may be able to make the required purchases, ensure
mobility and eatables, etc. If Indian Rupee is not acceptable in that country, he has to
exchange the currency from INR to the particular country currency where he is going. He
gets the foreign currency from the persons who deal in currency trading.
A local trader takes Indian currency, and in exchange, he gives foreign currency at the
exchange rates. For example, one USD is available today in exchange for Indian Rupees 81
and 19 paise.
If you are a beginner and want to learn more about Currency trading, this detailed article is
perfect for you; we have covered every bits-and-pieces of Currency Trading In India. So, be
comfortable and go through this article.
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What is Currency Trading?
Currency Trade Market is considered one of the most liquid markets globally, where the
currencies of all countries are exchanged from one currency to another currency for tourism
or business purposes. At present, currency trade markets record a turnover of USD 5 trillion
per day.
In India, one major advantage of currency trading is that comprehensive information on
interest rates and price movements is available in the market in real-time leaving little
possibility of any long-term price manipulation by the traders. The beginners must keep in
mind that currency trading is subject to global fluctuations which can be caused by political
or wars related turmoils.
The traders do not exchange the physical delivery of currency. At present in India, currency
trading is allowed through three exchanges – the National Stock Exchange (NSE), the
Bombay Stock exchange (BSE) and the Metropolitan Stock Exchange (MSE). All these
exchanges are regulated by SEBI and the Reserve Bank of India.
Further, it must be in 7 pairs only.
The most common seven currency pairs are USD/INR, GBP/USD JPY/INR, EUR/INR,
EUR/USD, GBP/INR, and USD/JPY.
How Does Currency Trading Work?
Trading in currency is entirely different from shares and derivatives. However, shares and
derivatives are often used in centralized marketplaces but currency trading is carried out
on computer platforms. This system is called the OTC system.
Most Familiar Terminologies Used in Currency Trading
Like other trading platforms, currency trading markets also have some common or familiar
terminologies that used in the market are mentioned below:-
Pairs
Whenever a currency transaction takes place, it involves two currencies. For example, if
Indian wishes to buy USD, the transaction will involve Indian currency, abbreviated as INR
and US Dollars, known as USD. This is called pair.
Pairs are further classified into three categories – Major Pairs, Minor Pairs, and Exotic Pairs.
Major pairs involve USD. Minor pairs do not involve USD, whereas, in Exotic Pairs, one of
the major currencies like EURO and other currencies of the developing economy like INR
are involved.
Pip
PIP is an abbreviation for a Point In Price or Price Point which defines the change in the
valuation of the currencies involved or the smallest movement taking place in the valuation
process. For example, if the current price of one USD equals INR 81.19 and if it changes to
one USD=INR 81.18, the PIP will be 0.01.
Base currency and Quote currency
Whenever a currency transaction takes place, it involves two currencies, and the transaction
is called a Pair. For example, if Indian wishes to buy USD, the transaction will involve Indian
currency, abbreviated as INR and US Dollars, known as USD. Here, INR will be treated as
the base Currency and USD as the Quote Currency.
The value of the base price will always be 1, and the quoted price will be the exchange value
of the quoted price. In the transaction involving USD/INR, 1 USD can be exchanged with
INR 81.15 as it is the exchange rate.
Bid and Ask price
In Currency trading, each pair has 2 prices – Bid Price and Ask price. The bid price is the
price the dealer wants to pay for the currency. The Ask price is at which the dealer will sell
the same currency.
Spread
The difference between the bid and the asking prices is called a spread. For example, if the
dealer purchases the USD @ INR 80.85 ask price is INR 81.15, and the spread would be
paise 30 only.
Lot size
As is generally seen in the dealings of shares/stock derivatives, currencies are traded in lots.
A lot size is the minimum quantity of units that have to be bought or sold under a contract.
For example, in India, one lot size for JPY/INR is 1,00,000 units, whereas lot size is 100
units for deals in USD/INR, EUR/INR, and GBP/INR.
Leverage
Leverage allows a Currency Trader to trade more than the cash they have, and instead of
paying the full amount, they pay a margin. For example, if one has INR 1,00,000 in the
trading account and the margin required is 5%, then they can trade currencies up to INR
20,00,000. The facility of leverage increases gains and losses as well, so a beginner must
take care.
Conclusion
In this article, we have covered the most important topics of currency, from the most familiar
terms to how currency trading works, and make you aware of how currency trading can be
done. If you are a beginner looking to trade currencies, then the best suggestion is to keep
all the above points in mind and do proper research before taking any step.
For further or detailed information about currency trading, you can consult the online broker
Invest By, a reliable and trustworthy broker that helps traders in different trading instruments,
such as forex trading, currency trading, trading in cryptocurrency, etc.
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