The foreign exchange (forex) market is the largest financial market, more significant than the equity or debt markets. Forex markets include various participants, including but not limited to retail forex brokers, investment management firms, banks, retail forex brokers, hedge funds, etc. You can trade in currencies in two ways – currency futures and currency options.
Currency futures are traded on platforms offered by exchanges like the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), and Metropolitan Stock Exchange (MSE). Currently, the forex market time is between 9.00 am and 5.00 pm. You can engage in GBP/INR investing or in any other currency pair. However, like stock trading, currency trading online too has its own risks and rewards. What are these? Find out here!
Risks in Currency Trading
Significant variables which pose a risk in currency trading are as follows:
1. Interest rate risk
Generally, when a country raises its interest rates, its currency strengthens in relation to other currencies as assets are shifted away from it to gain a higher return elsewhere.
2. Leverage risk
Leverage is considered a two-edged sword. You can gain more in a favourable situation. Similarly, you can lose heavily in an unfavourable trade. So, it would help to keep your position sizing low so the loss can be minimised.
3. Inflation risk
If inflation rises in any country, then its Federal Reserve Bank will be forced to suck excess liquidity from the markets by increasing interest rates, thereby strengthening its currency.
4. Geopolitical situation
One of the significant variables influencing any currency’s value is its country’s political situation and strength. If the economy struggles, it will depreciate its currency against other world currencies.
Rewards in Currency Trading
Some significant rewards in currency trading are:
1. Lower margin requirements
Unlike equity markets, currency trading online allows you to buy and sell on the margin provided by brokers, thereby enabling you to earn a decent return on your total capital.
2. High liquidity
You can take scaling positions in which you can open and liquidate a position within minutes or seconds of each other.
You can take hedging positions against your investments in foreign assets.
4. Gains from speculation
To gain from the highs and lows of the currency exchange rates, you must have an idea of the possible direction of the movement of currencies. For example, if there is a possibility of the USD going up because of a crude oil price rise, you should buy USD/INR future.
5. Extended market timing
You can take advantage of market conditions beyond 3.30 PM as currency trading continues till 5 PM. Additional market timing also ensures that the impact of important news will be factored into the prices. Consequently, there will be less scope for major gap-up or gap-down.
In a Nutshell
Although government regulations and frameworks have been put in place to ease the journey of any trader in this field, forex markets demand continuous tracking of new flows and daily price movements. There is an immense opportunity to mint money from currency trading if you can get a good hold on its variables.
Disclaimer: “This article is not to be construed as investment advice. Trading and investing in the securities market carries risk. Please do your own due diligence or consult a trained financial professional before investing.”