Beginners Guide To Currency Trading
Introduction:
Introduction:
In the truest sense of the term, the purchase and sale of international currencies is termed as currency trading. The primary aim of investors that actively participate in the currency market is to benefit from the fluctuations in rates. This holds true for customers that engage in trade at the individual as well as the institutional level.
Operational Scale:
Foreign Exchange or FOREX trade operates on a global scale and trading is open on a round-the-clock basis during weekdays. Currency spot,
currency futures and currency options are among the three major types of activities carried on here. Futures trading is currently open to Indian residents as well as banking and other financial institutions. It however remains closed to those who are not resident nationals in India as well as overseas institutional investors.
Regulations:
The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI), both collaborate to regulate and oversee the operations of the FOREX trades in India. Internationally, FOREX is commonly traded on the COMEX, while the National Stock Exchange (NSE) and Multi-Commodity Exchange (MCX- SX) remain firm favourites with traders in India.
Influential Factors:
There are numerous factors that affect currency values and these can chiefly be linked back to the politico-economic conditions prevailing at the time. The economic policies, stability in interest rates, rate of inflation as well as the political conditions are all factors that play a key role in determining the value of a particular currency. Governments as well engage in currency trades to ensure that their currencies are valued correctly. Though the sheer size and volume of trades make it difficult for any single factor to dominate currency valuations, large fluctuations cannot be ruled out, as it happens in the case of large orders.
The Long and Short of things:
As with every other trade, currency trade too aims at making a profit through purchases at a lower costs vis--vis sales at a higher rate. One of the methods used by traders to make profits is through short sales before an anticipated downward price correction. Long buys too are a way of making profits, albeit at a time in the future. Here, a currency is picked up at a lower price, in order to be sold at a higher rate, at a later date. But currency is always traded in pairs and the nature of the transaction is such that if one currency is traded short, the other must invariably be traded long.
Spot Trades:
Unlike futures trading that involves currency derivatives such as futures trading with settlements at a date in the future, spot trades are carried out on the basis of the current value of the instrument. Although the name suggests instant settlement, spot trade transactions are usually settled within two business days.
Valuations:
Besides national trade policies and political conditions, the valuation of a currency on the international level is usually dependent on a host of financial factors. Chief among these include:
Inflation rate both, the actual rate of inflation at a given point in time as well as the expectations surrounding it have a significant bearing on the value of the currency on the market
Internal Reserves: If the internal reserves of a nation are depleted and/or negative, the currency valuation shall be correspondingly weak
International Reserves: The overall ability of a nation to settle its debts and payables though the sale of its economic assets (raw materials, precious metal reserves, etc.) has a huge bearing on the valuation of its currency
Export/Import Balance: Nations whose exports consistently outstrip their imports tend to have a stronger currency in relation to those whose imports far exceed their total exports
The daily volume of trade on the currency market runs to the tune of trillions of dollars. This not only puts it above and beyond the reach of the daily transactional turnover of NASDAQ and others, but the blistering pace of growth, makes it the fastest growing market around!
by: Chris L
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