In today’s article, we’ll be talking about trading in different international currencies.I am writing this article assuming that the person reading this article knows indian stock, commodity, currency market trading well enough as I’ll be relating lot of features of this international currency market with indian markets for better understanding.If you’ve missed articles on indian market then here is the link. So, we can say , this article is for the indian market traders, who want to know about international currency market for learning purpose only.
In international forex trading, we trade on different currencies like eur,usd,gbp,usd,usdjpy etc.
Lets assume, your analysis says – “EURO price will move up against US-DOLLAR in next few days” . Now how to make money out of this thought based on some analysis you may have done.Yes>> you need currency market here for that trade to take place in euro Vs dollar. Lets checkout this currency market on a trading screen where we’ll be trading this market realtime in future .Have a look :
As you’ve seen in above video, all the currencies are displayed in a “pair” form. So in currency market, we trade currencies in pairs like eurusd,eurgbp,usdjpy etc.
In a currency pair, we always trade the first currency using the second one, means in eurusd pair – we’ll be buying euro using US-DOLLAR. SO , if euro price increases against dollar in future, we make money – SIMPLE !!! Lets have a short note on this topic – In a pair, first currency is known as base currency & the second currency is known as term currency .We always trade the base using term currency. Like, in GBPUSD pair GBP is the base currency & USD is the term. If we see pound price will move up against dollar, we can buy pound using dollar & once pound price hikes up,we can take the profit.
Forex market is open 24 hours a day & 5 days a week.The major world trading centers are located in London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney.The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading of currencies. In terms of volume of trading, it is by far the largest market in the world.
Here are Some important key points in international forex trading :
1) OPEN AN A/C : Firstly open an account with a forex broker.You’ll find lot of brokers once you search it in google. There is nothing like demat account we open for stock market trading here, as it’s a pure speculation based market.So if you’ve gone through my stock market trading article & know about future market trading, then you know the trading operations of forex also.Like future market, in forex we’ll have to use margin facility & lot size. The most attractive part of forex is, we do not have expiry cycles in forex trading like we have in future,option market trading in india.So you can buy a currency with margin & hold it on margin for life till the time you manage the position.Now, manage the position means, in case if you are loosing with the position & do not want take loss,you will have to keep on depositing the difference only for your loss amount in trading account & your position will be held open.
2) PIPs : In stock market, lets assume xyz stock moved up from rs 250/ per share to rs 260/ per share in a week.We say , there is a 10 points upmove in this stock. Sameway in forex, when eurusd moves from 1.2050 to 1.2060,we’ll be saying there is a “10 pips” move in this pair.So,instead of points like stocks, we’ll be saying pips in forex price movement calculation.
3) SPREAD : Difference between buy & ask price is known as “SPREAD”.Lets have a screenshot of the currency price quote in market :
You’ll see in above pic, for every currency pair,there is a “BID” & a “ASK” price. BID price is a selling price for us & ASK price is a buying price for us.
In eurusd, the difference is 1 PIP as bid=1.2923 & ask=1.2924 hence spread is 1 pip
In nzdusd, the difference is 3 pips as bid=0.7115 & ask=0.7118 hence spread is 3 pips
4) BROKER COMISSION : The spread in a pair is the commission goes to your broker’s pocket.
Like in above example, for eurusd there will a commission of 1 pip goes to broker as his commission(as the spread is 1) & for nzdusd, there will be commission of 3 pips (as the spread is 3) charged by broker. There will be no other charges when closing your open trades like stock market.In stock market, generally broker charges for buying & selling both transactions.But in forex, you’ll be charged only once by broker when you open a trade & that is also not on your total transactions but on the spread of the pair.
5) Leverage : In future market trading in india, we do not need to deposit the full amount for shares we buy & we pay 20% margin on behalf of the total amount which means when you buy some future contract of shares for rs 5,00,000/,you need to have Rs 1 lakh in you’re a/c. Now,this situation can be explained other way like we can say, you got a leverage of 5 times of your capital so on 1 lakh capital,you bought 5 lakhs of shares.So, I hope you understood what does it mean by leverage !! In international forex trading, the leverage is upto 400 times. Can you imagine the difference ??? 5 times in stock market VS 400 times in forex !!!!!!!!
So, if you have $100 in your account in internation forex market, you can buy anything for $40,000!!!!!!!!!
which means in indian stock market, if you have rs 6000/ is your account,you are allowed to buy shares for Rs 24,00,000/ !!!!!!!!! but unfortunately, we don’t have this facility in indian market.
6) LOT SIZE : In future market in india, we trade on fixed lot sizes. Sameway, we trade forex market with fixed lot sizes but international forex markets offers you different variations in lot sizes which makes this market more flexible to trade.All transactions can be conducted via standard, mini, micro or sometimes as low as nano or penny size.Here is a pic below to show you different lot size:
Lets make it simple,
In forex , generally lot size starts from 1000units. It means, minimum 1000units of eurusd you’ll have to buy for a trade. While trading, this 1000unit is expressed by marking 0.01 in your trading system.There are 0.01, 0.02, 0.03, 0.04 lot sizes you’ll see in trading screen which means
1000qty represented by 0.01
2000qty represented by 0.02
3000qty represented by 0.03
4000qty represented by 0.04
And it goes on for 5000,6000,7000,8000,9000 qty as 0.05,0.06,0.07,0.08,0.09 lot size
10,000qty represented by 0.1
20,000qty represented by 0.2
And it goes on for 30k,40k,50k,60k,70k,80k,90k for 0.3,0.4,0.5,0.6,0.7,0.8,0.9 lot size
1,00,000 qty represented by 1
2,00,000qty represented by 2
And it goes on………………….
Now, If we buy eurusd for 1.2250 with a lot size 0.01, it means –
Our position size = 1000*1.2250 = 125$
If we sell eurusd for 1.2280 now,
Our position size = 1000*1.2280 = 128$
SO we make a profit of 3$ in this trade.
How much investment was required for this trade ??????
As we know we get a margin of 400times hence if we have 1$ in our a/c, we can take a position in market for $400 !!!
and in above trade, we bought eurusd for $125 !only & still we can use $275 to take further position in market.
So when we take a position in 0.1 lot size which represents quantity size of 10,000 units, our investment becomes = eurusd rate * 1000$ qty = 1.2250*1000$ = $1225 of investment for which we require an investment $4(as we get 400times margin) and while trading in 0.1 lot size,every tick up & down you make or loose 1$ as shown above.
7) Market Timing : Forex market is open 24 hours a day. It provides a great opportunity for traders to trade at any time of the day or night. However, when it seems to be not so important at the beginning, the right time to trade is one of the most crucial points in becoming a successful Forex trader.The best time to trade is when the market is the most active and therefore has the biggest volume of trades.Actively traded markets will create a good chance to catch a good trading opportunity and make profits. While calm slow markets would literally waste your time & efforts — turn off your computer and don’t even bother! As per indian timings, forex markets opens up on MONDAY morning around 4am from sydney,then TOKYO market opens up by 6am,then UK market opens up by 2pm & finally US market opens up by 7pm.So it starts on monady 4am & ends on saturday 3am with US market closing. As this market has a better flexibilty in terms of timings ,it provides you lot of trading opportunities throughout the day which is not possible in indian stock market for being a 6 six hours trading market.
Below is a video presentation of all the above topics we discussed :
Finally, While trading in internation forex market, you also get a chance to trade the global indices like
US MARKET INDICES – S&P , DOWJONES & NASDAQ
EUROPEAN INDICES : FTSE , CAC40 , DAX
ASIAN MARKET INDICES : NIKKEI , HANG SENG ………………etc
As a starter, you should open a demo trading account first with any of the broker you can find in GOOGLE. Follow this link to read how to install a demo trading account & set it up. Tracking international markets & currency will give a better edge in your indian market trading as a trader, as our indian markets are linked up with international markets in terms of price behavior & it reacts on international markets fall or rise!!!So, if you can read a breakout move coming up in US market or in comex gold,that will help you to catch the move in indian market before it happens here.Reading international markets can also be used as a confirmation of your indian market trade direction for better accuracy.There are some limitations when you open an a/c & trade with real money in this international markets which are discussed broadly in my member section area of training course.
What we discussed above, are the basic understandings of international currency market trading. Once you’re tuned up with the basic ideas we discussed here,i’ll suggest you to read the article regarding TECHNICAL ANALYSIS. As you’ll have to learn technical analysis next, to know which currency to trade & where to buy/sell.