How to trade forex for beginners? Is Forex trading legal in India

The foreign exchange market is a global decentralized or over-the-counter market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspects of buying, selling, and exchanging currencies at current or determined prices.


forex trading


Forex is a portmanteau of foreign currency and exchange. Foreign exchange is the process of changing one currency into another currency for a variety of reasons, usually for commerce, trading, or tourism. According to a recent triennial report from the Bank for International Settlements (a global bank for national central banks), the average was more than $5.1 trillion in daily forex trading volume.


What is the forex market?

The foreign exchange market is where currencies are traded. Currencies are important to most people around the world, whether they realize it or not because currencies need to be exchanged in order to conduct foreign trade and business. If you are living in the U.S. and want to buy cheese from France, either you or the company that you buy the cheese from has to pay the French for the cheese in euros (EUR). 


This means that the U.S. importer would have to exchange the equivalent value of U.S. dollars (USD) into euros. The same goes for traveling. A French tourist in Egypt can't pay in euros to see the pyramids because it's not the locally accepted currency. As such, the tourist has to exchange the euros for the local currency, in this case, the Egyptian pound, at the current exchange rate.


One unique aspect of this international market is that there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange. 


The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney—across almost every time zone. This means that when the trading day in the U.S. ends, the forex market begins anew in Tokyo and Hong Kong. As such, the forex market can be extremely active at any time of the day, with price quotes changing constantly.


What is the history of forex?

Unlike stock markets, which can trace their roots back centuries, the forex market as we understand it today is a truly new market. Of course, in its most basic sense—that of people converting one currency to another for financial advantage—forex has been around since nations began minting currencies. 
But the modern forex markets are a modern invention. 

After the accord at Bretton Woods in 1971, more major currencies were allowed to float freely against one another. The values of individual currencies vary, which has given rise to the need for foreign exchange services and trading.

Commercial and investment banks conduct most of the trading in the forex markets on behalf of their clients, but there are also speculative opportunities for trading one currency against another for professional and individual investors.

Spot market and the forwards & futures Markets

There are actually three ways that institutions, corporations, and individuals trade forex: the spot market, the forwards market, and the futures market. Forex trading in the spot market has always been the largest market because it is the "underlying" real asset that the forwards and futures markets are based on. 

In the past, the futures market was the most popular venue for traders because it was available to individual investors for a longer period of time. However, with the advent of electronic trading and numerous forex brokers, the spot market has witnessed a huge surge in activity and now surpasses the futures market as the preferred trading market for individual investors and speculators.
 
When people refer to the forex market, they usually are referring to the spot market. The forwards and futures markets tend to be more popular with companies that need to hedge their foreign exchange risks out to a specific date in the future.


More specifically, the spot market is where currencies are bought and sold according to the current price. That price, determined by supply and demand, is a reflection of many things, including current interest rates, economic performance, sentiment towards ongoing political situations (both locally and internationally), as well as the perception of the future performance of one currency against another.

 
When a deal is finalized, this is known as a "spot deal." It is a bilateral transaction by which one party delivers an agreed-upon currency amount to the counterparty and receives a specified amount of another currency at the agreed-upon exchange rate value. After a position is closed, the settlement is in cash. Although the spot market is commonly known as one that deals with transactions in the present (rather than the future), these trades actually take two days for settlement.

Unlike the spot market, the forwards and futures markets do not trade actual currencies. Instead, they deal in contracts that represent claims to a certain currency type, a specific price per unit, and a future date for settlement.

In the forwards market, contracts are bought and sold OTC between two parties, who determine the terms of the agreement between themselves.

In the futures market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets, such as the Chicago Mercantile Exchange. In the U.S., the National Futures Association regulates the futures market. 

Futures contracts have specific details, including the number of units being traded, delivery and settlement dates, and minimum price increments that cannot be customized. The exchange acts as a counterpart to the trader, providing clearance and settlement.

Both types of contracts are binding and are typically settled for cash at the exchange in question upon expiry, although contracts can also be bought and sold before they expire. The forwards and futures markets can offer protection against risk when trading currencies. Usually, big international corporations use these markets in order to hedge against future exchange rate fluctuations, but speculators take part in these markets as well.

Note that you'll often see the terms: FX, forex, foreign-exchange market, and currency market. These terms are synonymous and all refer to the forex market.

Forex for Speculation

Factors like interest rates, trade flows, tourism, economic strength, and geopolitical risk affect supply and demand for currencies, which creates daily volatility in the forex markets. 

An opportunity exists to profit from changes that may increase or reduce one currency's value compared to another. A forecast that one currency will weaken is essentially the same as assuming that the other currency in the pair will strengthen because currencies are traded as pairs.

Imagine a trader who expects interest rates to rise in the U.S. compared to Australia while the exchange rate between the two currencies (AUD/USD) is 0.71 (it takes $0.71 USD to buy $1.00 AUD). The trader believes higher interest rates in the U.S. will increase demand for USD, and therefore the AUD/USD exchange rate will fall because it will require fewer, stronger USD to buy an AUD.

Assume that the trader is correct and interest rates rise, which decreases the AUD/USD exchange rate to 0.50. This means that it requires $0.50 USD to buy $1.00 AUD. If the investor had shorted the AUD and went long the USD, he or she would have profited from the change in value.

Currency as an Asset Class

There are two distinct features to currencies as an asset class:

  • You can earn the interest rate differential between two currencies.
  • You can profit from changes in the exchange rate.
An investor can profit from the difference between two interest rates in two different economies by buying the currency with the higher interest rate and shorting the currency with the lower interest rate. Prior to the 2008 financial crisis, it was very common to short the Japanese yen (JPY) and buy British pounds (GBP) because the interest rate differential was very large. This strategy is sometimes referred to as a "carry trade."

Why we trade in the forex market?

Currency trading was very difficult for individual investors prior to the internet. Most currency traders were large multinational corporations, hedge funds, or high-net-worth individuals because forex trading required a lot of capital. 

With help from the internet, a retail market aimed at individual traders has emerged, providing easy access to the foreign exchange markets, either through the banks themselves or brokers making a secondary market. Most online brokers or dealers offer very high leverage to individual traders who can control a large trade with a small account balance.




Forex Trading Risks

Trading currencies can be risky and complex. The interbank market has varying degrees of regulation, and forex instruments are not standardized. In some parts of the world, forex trading is almost completely unregulated.

The interbank market is made up of banks trading with each other around the world. The banks themselves have to determine and accept sovereign risk and credit risk, and they have established internal processes to keep themselves as safe as possible. Regulations like this are industry-imposed for the protection of each participating bank.

Since the market is made by each of the participating banks providing offers and bids for a particular currency, the market pricing mechanism is based on supply and demand. Because there are such large trade flows within the system, it is difficult for rogue traders to influence the price of a currency. This system helps create transparency in the market for investors with access to interbank dealing.

Most small retail traders trade with relatively small and semi-unregulated forex brokers/dealers, which can (and sometimes do) re-quote prices and even trade against their own customers. Depending on where the dealer exists, there may be some government and industry regulation, but those safeguards are inconsistent around the globe. 

Most retail investors should spend time investigating a forex dealer to find out whether it is regulated in the U.S. or the U.K. (dealers in the U.S. and U.K. have more oversight) or in a country with lax rules and oversight. It is also a good idea to find out what kind of account protections are available in case of a market crisis, or if a dealer becomes insolvent.

Pro & Cons

Pro: The forex markets are the largest in terms of daily trading volume in the world and therefore offer the most liquidity.2 This makes it easy to enter and exit a position in any of the major currencies within a fraction of a second for a small spread in most market conditions.

Challenge: Banks, brokers, and dealers in the forex markets allow a high amount of leverage, which means that traders can control large positions with relatively little money of their own. Leverage in the range of 100:1 is a high ratio but not uncommon in forex. A trader must understand the use of leverage and the risks that leverage introduces in an account. Extreme amounts of leverage have led to many dealers becoming insolvent unexpectedly.

Pro: The forex market is traded 24 hours a day, five days a week—starting each day in Australia and ending in New York. The major centers are Sydney, Hong Kong, Singapore, Tokyo, Frankfurt, Paris, London, and New York.

Challenge: Trading currencies productively requires an understanding of economic fundamentals and indicators. A currency trader needs to have a big-picture understanding of the economies of the various countries and their inter-connectedness to grasp the fundamentals that drive currency values.

Is Forex trading illegal in India?


Trading on other pairs Except INR is illegal under the FEMA Act. Trading in the forex market through an online broker is a Non-Bailable Offence in India. ... It's perfectly legal to trade anything with Indian Exchanges(NSE, BSE, MCX-SX) offering Forex Instruments Currently USDINR, GBPINR, JPYINR, EURINR)Forex trading is legal in many countries, But it's illegal in India. Its a profitable business but very risky. 

Before you start trading, education is a must or you stand the risk of losing your funds. Besides, a lot of brokers operate illegally without been regulated so beware before taking any action regarding investing.

What is the best time to trade in forex in India?

As You all know forex trading is 24 hr trade business, But as per my experience the best time to trade in the forex in India is 6 pm to 9pm, But Lots of trade between  You can make a lot of good profits in that period of time during the London and NY session, Only if you know how to trade this forex market and can predict well with your analysis, 


Forex trading in India & RBI Guidelines

First, a clarification – Foreign Exchange trading or Forex trading in India is illegal. It may sound a little surprising and strange that why should there be an article about what is not allowed?

Let me explain- there are a lot of offshore online portals (based in countries that are considered to be tax havens and are outside the purview of the Indian legal framework) that allow an individual to trade online in foreign currency with a small margin; however, that is not allowed by the RBI.

These portals advertise aggressively and try to lure customers with a promise of high returns by making a small investment but remember apart from being illegal these dealings can be fraught with operational risks.


What RBI allows and is generally understood as Forex trading in India is trading in currency derivatives. As per RBI rules, “a person resident in India may enter into currency futures or currency options on a stock exchange recognized under section 4 of the Securities Contract (Regulation) Act, 1956, to hedge an exposure to risk or otherwise, subject to such terms and conditions as may be set forth in the directions issued by the RBI from time to time”.


Forex Trading in India - Rules and Procedures.

So now that we understand that trading in only forex derivatives is permitted by Indian law let us get an overview of the rules and procedures that govern this trade in India. The framework for trading in derivatives has been set up by the RBI and SEBI while the legal guidelines are provided by FEMA (Foreign Exchange Management Act) provides the legal guideline for

Trading in currency derivatives on recognized exchanges has been permitted by RBI and SEBI since 2008.

Currently, you can trade in three stock exchanges; these are the National Stock Exchange (NSE), MCX-SX, and the United Stock Exchange (USE).
Initially, only futures for the INR/Dollar pair were allowed; later more pairs were introduced. At present you can trade in derivatives of Dollars, GBP, Euro, and Japanese Yen; you can also trade in Dollars and Interest Rate Futures on 10 Y GS 7 and 91 D T-Bill.

  • Currency options are also available with underlying as US Dollar /Indian Rupee (USD-INR) spot rate.
  • Derivatives are traded on margin; you are required to deposit an initial margin with the exchange through your financial intermediary.

  • Contracts are always settled in cash and in Indian Rupee; settlement is guaranteed by the exchange.
  • The futures have a cycle range from 1 month to 12 months; for options, it is three months.

  • The lot size for futures is 1000 per unit except for the JPY/INR pair where the lot size is 100000 units.

What is the punishment for forex trading in India? 


What is the punishment for doing Forex trading in India? There is no punishment unless you are breaking FEMA law in a drastic manner. In short, you can not be punished because RBI doesn't govern individuals directly, rather it governs banks.

Forex trading in Islam

A lot of people also believe that Forex is banned in countries where Islam is practiced. However, this is not quite true.

Sharia Islamic Law, namely the law of Islam, prohibits giving or receiving interests in any form. The reason for this prohibition lies in the conviction that the adherents of Islam should give only to give, and not to get something back. Therefore, according to these beliefs, not the Forex trading itself is prohibited, but a swap.

A swap is a daily charge or withdrawal from the deposit of a trader of money for the transfer of a position on open trades over the night.
But in such a case, swap-free accounts or Islamic accounts with no swap were created. All commissions in the form of interest are absent in Islamic accounts. Thus, Sharia law is not violated, and Forex becomes accessible to all.

So, Forex trading is not banned in the world. Moreover, every day more and more traders come here who successfully trade and earn money. If you’re looking for a good broker, take a look at JustForex – an international broker offering good trading conditions and a reliable process of depositing and withdrawal of funds.

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