The Role and Importance of Currency Trading…!!
Traders trade in various things, whether its stock, equity, commodities, bond and even in currency. Currency trading is purchasing and selling of the currencies in the foreign exchange, with the objective of making profits. It is also called Forex Trading. The global foreign exchange market has jumped to the highest level of $6.6 trillion in September 2019. It is rising and gaining momentum. In India, the rise in currency trading happens after the introduction of its futures in NSE and the BSE. Both the respective exchanges offer the future and options to trade. Currency Futures are mainly Exchange-traded futures contracts that usually specify the price in one currency at which another currency can be bought and sold at a future price. Whereas, Currency Option is a contract that gives the buyer right, but not obligation to buy or sell a security at a future date. A trader can trade in either of them. One of the advantages of currency trading is that it offers liquidity.
The working of currency trading in India:
There are certain currencies, which are called hard currencies such as Dollar, Euro, Pound, Yen because they can be freely traded around the world and backed by their strength of economies. In Forex Trading, currencies are considered in pairs like GBP/USD, EUR/USD, YEN/USD, INR/USD. In India, RBI allows an investor to trade in the following currency pairs:
The role of the trader is to predict where the exchange rate will go up or down. If a trader thinks that, the rupee will be stronger against the dollar, then he/she will buy rupee. This is considered as ditching the dollar. If the prediction of the trader goes right, he/she will book a profit. But in case, if the dollar rises, then the trader will book a loss. Let’s look at the advantages of trading in currency.
In currency trading, liquidity is the highest of all segments. There is always ample of traders who like to purchase and sell foreign currencies. The forex trading market size is 50 times bigger than the New York Stock Exchange and liquidity of such a large market ensures price stability. Their trading signals are more liquid and permit forex traders to take the benefit of trading opportunities.
- High Leverage: Currency trading provides one of the highest leverages. Leverage is when you trade in currency derivatives. In the case of India, Brokerage firms provide a margin of 50% of NRML Margin. That’s huge leverage in the trading and presents the potential for extraordinary profit with a very small investment.
- Arbitrage: In arbitrage, buying and selling of an asset happen simultaneously on different platforms, exchange, and locations to cash in on the difference in prices.
- Speculation: It is the process of trading a financial instrument with high risk in expectation of higher returns. In the forex market too, a trader buys and sells a currency expecting to earn high returns. Speculators buy the currency when it is weak and sell it when it is strong.
Factors Affecting Currency Trading
The currency market goes through the highest volatility, as it is affected by different economic and political conditions. It is affected by different economic and political conditions. Let’s look at the factors that affect currency trading :
- Inflation rates: The change in inflation causes a change in currency exchange rates. A lower inflation rate compared to other currencies will see an appreciation in the value of a currency.
- Interest rates: Interest rates have a direct impact on currency values. An increase in interest rates means an increase in the value of a country’s currency.
- Political stability: A nation’s political stability affects its economic strength. A country with high stability draws more investor funds, as it helps in increasing direct investment. A nation with sound financial and trade policy does not provide any room for uncertainty in the value of its currency.
- Economic Conditions: It’s good to watch the economic condition of the country. If the country is in an economic slowdown, then the interest rate is likely to fall, which makes the respective country’s currency weak, but in case if the country’s economy is getting stronger, then the interest rate will rise, then it makes the currency stronger.
All these factors help in affecting the currency trades. So, one must be kept updated with project data on inflation, interest rate, and economic condition, before making a trade in currency.
*Disclaimer: investment in securities market are subject to market risks, read all the related documents carefully before investing