Since you won’t receive delivery of currency into your account at the end of the day, a Demat account is not necessary to begin Forex trading in India.
The trades are all settled in cash. To begin forex trading in India, you only need a bank account and a forex trading account.
If you don’t already have one, check out our list of the top forex brokers in India for 2022.
Factors to Consider Before Opening a Forex Brokerage Account
Leverage
The multiplier, or X times the available margin, is known as leverage. For instance, if you have $10,000 in your account and a 10x power, you can take a $10,000 x 10x = $100,000 position worth.
Leverage offered by forex brokerage firms ranges from 50:1 to 300:1, with a maximum of 300:1. Using power can generate significant returns on a modest investment. Losses, however, are also increased if the deals fail.
In general, the level of risk increases as the leverage increases. Brokerage firms have safeguards in place to stop accounts from losing money.
Commission & Fees
You don’t have to pay commissions on each FX deal, in contrast to stock trading. Instead of brokers, direct dealings in forex are through market makers.
The spread on a currency pair varies from company to company. The difference could be as little as one pip (0.0001), but if there are a lot of volumes, it could have a significant impact. More pips can be won or lost with wider spreads.
You must review the spreads the brokerage firms offer on the currency pairs you plan to trade.
Other Factors
Other considerations in choosing the finest forex broker in India include the fees charged and the various levels of services and programs offered to distinguish privileged members. Added to that are the training and support programs for educators.
Brokerage firms for foreign exchange are governed market actors. Look for the number of jurisdictions that regulate the company.
Regulated market players must adhere to benchmark norms and have a minimum capital, which promotes ethical business activities. Before opening an account, research the company’s reputation.
How to Do Forex Trading In India in 2022
You can do trading in forex by purchasing and selling currency pairs or buying derivatives like futures and options. Both are pretty comparable to stock trading.
Purchasing and Selling
When buying and selling essential currency pairs, you are long on the team because you think its value will rise and you will profit.
For illustration, suppose you paid 1.2936 for a GBP/USD pair. If the value rises to 1.2937 or higher, you will make money; if it falls to 1.2635 or below, you will lose money.
When the GBP appreciates versus the US Dollar, the pair goes up.
Using Derivatives
Utilizing derivatives such as futures and options on the currency pairings is the alternative method of trading forex.
By purchasing a futures contract, you commit to buying the underlying currency pair at a predetermined moment in the future. In contrast, buying an option on a currency pair allows you to believe that the currency pair is at a specific price before a specified moment in the future.
When you buy an option, you purchase a right that you must exercise, or it will expire before the specified time and date.
Although you should understand the foundations of derivative products before you begin trading, they can initially seem somewhat confusing.
Types of Forex Trading Orders
Knowing the many kinds of orders that you may place will be helpful now that you are familiar with FX trading.
Market Order or a Limit Order
The initial order to create a new position—which may be a buy or sell post—is placed in this manner. You currently have two options.
Market Order
The best exchange rate currently offered is trading at the market order.
The market order is carried out right away at the current exchange rate.
Limit Order
Setting a limit order, another option, will allow you to specify the price you wish to purchase or sell.
When the rate reaches a specified limit, one executes only limited orders.
Take Profit Order
A trader may wish to lock in profits for an open position by submitting a take-profit order.
For instance, a trader can be confident that the GBP/USD rate will reach 1.2940 but uncertain how much higher it will go. Then he might put a take profit order to lock in the gains.
In addition, when the rate hits the predetermined set limitations, the take-profit orders are also fulfilled. The rate may advance more or won’t reach the threshold needed to fulfill the order.
Step-Loss Order
When a trader places a take-profit order, they are restricting profits. A stop-loss order is the exact opposite.
As an illustration, suppose you buy GBP/USD at 1.2936 and know that the most significant loss you can accept is three pip. In this scenario, you can place a stop-loss order for closing the position at 1.2933.
If the rate declines further, a stop-loss order limits the losses.
How Much Leverage is Right in Forex Trade
Leverage in forex trading can reach 300:1, meaning that $100 in your account can allow you to trade up to $30,000.
One of the reasons forex traders lose money is improper usage of leverage. The wise course of action is to educate yourself and select a comfortable degree of leverage that matches your proficiency with forex trading.
High Leverage Risk
High leverage is the same as borrowing a sizable cash to take positions. Any negative rate change can result in significant capital erosion.
Let’s use an example to understand better. Assume you have $1,000 in your account and utilize a leverage ratio of 200:1, meaning you have borrowed $200 for every dollar you own.
You can now trade up to $1000 multiplied by 200, which is $200,000.
Three lot sizes are available for forex trading.
- One hundred thousand units for a standard lot, 10,000 units for a mini lot.
- One thousand units for a micro lot of any currency.
- You can purchase two ordinary lots for $200,000.
One hundred thousand times 0.0001 equals ten change units for one pip movement in a standard lot. As a result, each pip movement will cost $20 ($10 x 2 = $20). You stand to lose 25 pip x $20 = $500 if the trade goes against you by that much. It accounts for half of the capital’s total amount.
Lower Leverage
Now, if you had limited your leverage to a 50:1 ratio in the identical case, you would have a tradeable amount of $50,000 ($1000 x 50), which is adequate to buy five small lots. One pip movement in micro lots costs $1. The cost of each pip movement is $5.
You stand to lose $5 times 25 for a total loss of $75 if the position is incorrect, even by 25 pip, which equates to 7.5% of the entire sum.
How to Choose the Correct Level of Leverage
It would be appropriate to use a smaller leverage of 5:1 or 10:1 if you are just getting started and learning. It will take time and experience to find the right power.
The wise thing to do is
Use leverage that is comfortable for your forex trading.
Limit each position to 1% to 2% of the entire capital and use stop-loss orders to minimize losses.
Conclusion
We hope that you enjoyed our article on the basics of Forex trading.
There are many brokers in the market where you can start trading. But it would help if you did proper research before you started trading. You should ensure that the broker you deal with is reputed and genuine.
Forex trading can be an enriching and fun experience, so if you’re interested in getting started, we recommend you check out our post on Forex trading in India for beginners.