India’s financial ecosystem is so diverse that you can trade stocks, commodities, and even a pair of currencies! Those who trade stocks are known as stock traders, commodities as commodity traders, and the ones who trade currency pair derivatives are known as forex traders!
What is a Forex Currency Trader?
A foreign exchange trader or forex trader buys and sells different currencies like USD-INR, EUR-INR, EUR-USD, and using a forex trading platform. These traders are known by many names.
Some call them fx traders while others simply refer to themselves as currency traders. Either way, someone who trades currencies either directly or via derivatives is known as a forex trader.
If you’re new to trading or the world of derivatives, you should know this – a derivative is a financial contract that has an underlying instrument.
A currency derivative will have the exchange rate of a currency pair as its underlying. When a forex trader buys and sells a derivative, they’re essentially trading futures or options contracts of a currency pair.
Currency futures will give the forex trader the right and the obligation to exchange the currency pairs at a later date. This means that the trader will have to square off the contract before it expires in case they’re only in it for the profits.
That said, you won’t receive a stack of foreign currencies at your doorstep if you’re a forex trader in India because currency derivatives are cash-settled (not physically settled).
On the other hand, a fx trader who trades currency put and call options will get the right to exchange a pair of currencies at a later date. However, the trader can choose to not exercise the contract.
By the way, the number of currency options contracts in India is limited to one currency pair: USD-INR.
The goal of trading currency derivatives is to use the difference between the exchange rate of two currencies to create incremental profits.
That’s why forex traders analyze the currency exchange rates, typically using technical analysis and indicators like Bollinger Bands. Some may even throw fundamental analysis into the mix.
This brings us to the next aspect of being a currency trader. You could either act on your own as a retail (individual) trader or work for an organization that manages people’s money.
Being a retail trader will allow you to work for yourself and create forex trading strategies based on your goals. It will also allow you to be label and designation free and you’ll be your own boss.
On the other hand, there are several organizations, especially asset management companies, that employ forex traders to generate profits for their clients.
The type of forex traders who work for top AMCs have labels and designations like Forex Analyst, Forex Researcher, Forex Strategist, & more.
Of course, all of them will be paid a salary but they’ll be working towards achieving the goals of the company and its clients.
How Does a Forex Trader Work?
The forex market is the world’s largest financial market, with more than 7.5 trillion dollars being traded regularly. That is about 25 times the volume of global equities!
Even then it has a place for everyone, including retail forex traders and institutional traders. There are primarily three types of currency pairs you can trade in India.
Forex traders call the first set “major pairs”. This includes all pairs with USD as the base or quote currency – the ones that are the most traded around the globe.
The next one is minor currency pairs which include all Dollar currencies other than the USD. Finally, forex traders can buy and sell exotic currency pairs that include currencies from emerging economies.
If you’re an India forex trader who’s dabbling in futures and options, you can trade 3 of the 5 most popular pairs in the world. Other than that, you can trade several currency pairs that include INR.
Now that you know what currency pairs a forex trader can trade in India, let’s take an example. We’ll stick to USD-GBP futures. Suppose that the GBP is quoted at 1.1900 USD.
If you as a forex trader decide to purchase 1,000 GBP, you will spend 1,190 USD. If the value GBP price rises to 1.3000 USD and you choose to sell your position, you will get 1,300 USD.
In this example, you must note that the U.S. Dollar is the base currency while GBP is the quote currency in forex trading. Base currency is the first currency in the currency pair, and it is also referred to as transaction currency.
The quote currency is the second currency of the pair and is also termed the counter currency.
This means you will be earning a net profit of 110 USD. But a forex trader won’t look at the dollar amount directly. They’ll look at the Percentage in Points or PIPs.
You can come back to this blog after reading our story on pips here: PIP Calculation in Forex Trading
Based on their analysis, a forex trader decides whether the trade would be lucrative or not. One thing you need to remember is that the forex currency market offers large profits with huge risks.
Should You Become a Forex Trader?
With the boom of the internet, online forex trading has replaced traditional methods. In the past, forex traders spent their entire day agreeing and finalizing trades over calls.
Furthermore, they would spend most of their time reviewing forex price charts and factors that may affect national economies.
But now, you have online forex trading platforms that offer more than just an avenue for buying and selling forex derivatives.
Everything from charting software to various types of orders is available on platforms like Dhan. You can use these tools to analyze the forex derivatives tradable in India.
That said, the forex market contains its own challenges. Firstly, institutions with deep pockets and knowledge participate in currency trading.
You as a retail forex trader may not have access to the same information or trading system. Moreover, currencies work very differently from stock or commodity markets.
But that does not necessarily mean that there’s no money to be made by trading forex. Derivatives allow you to speculate with benefits like margin and leverage.
The overarching question of whether or not you should become a forex trader begins with your financial goals.
Some trade forex to create incremental short-term wealth. Others simply do it because it’s thrilling. Nevertheless, you must learn forex trading before getting started.
You must’ve understood the answer to the question – what is a forex currency trader – lies in trading currency pairs or forex derivatives either as an individual or as an employee of financial institutions.
If you plan to become a forex trader, you need to sharpen your analytical skills.
It is essential to do your groundwork and diligently perform the technical analysis while finalizing your trading strategy and implementing them on a forex trading platform!
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