Export and import business involve the exchange of foreign currency, such as the conversion of Indian rupees into the US dollar. How does this happen? Can a common trader trade currencies in the same way as stocks to increase his profit margin? These are just a few of the questions we can answer.
Before we get into the details of how to trade USD INR in USD, let's first understand what the foreign exchange market is and how it differs.
The Forex market is not like the stock market. You can trade in USD, EUR INR, JPY USD and GBP INR currencies. It is global with multiple trading spots around the globe. You can choose any one of these currencies to trade as an Indian trader. These currencies have been benchmarked against the Indian Rupee. EUR stands for Euro, and JPY is for the Japanese Yuen. GBP stands for Great Britain Pound. Trades can be made on exchanges like NSE, BSE and MCX-SX. The most widely traded currency trading pair is the USD INR.
Before you start learning about currency trading, you should remember that it is done in pairs. You can trade in USD INR, EUR INR and JPY INR as an Indian trader.
Two currencies are available for each pair. The base currency is one unit, while the quotation currency is the other. Base/quotation refers to the value of the quotation currency. In the case of USD INR trading USD is the base currency and INR is the quotation. One USD is 75.76 INR.
If you're a trader, and you buy USD INR, then you expect that the pair's value will rise. The price of a currency pair is inclusive and includes bid and ask prices. This is the price at the exchange rate you can purchase and sell the pair.
What factors influence currency pair prices
Any significant economic event will usually cause price movements. Because there are two currencies involved, USD and INR, major economic events will usually cause price movements.
You'll also hear the term 'pip’ in relation to currency trading. What does this mean? It is the most basic unit of foreign exchange trading. The Reserve Bank will quote references rates up to the fourth decimal point. Foreign reserves can be affected by even the smallest difference at this fourth decimal point. Currency is quoted up to the fourth decimal point around the globe. This is known as PIP, or point in percentage. It is set at 0.0025 USD INR. This is also known as tick size. The lot size is typically set at USD 1,000. You can earn Rs 2.5 per pip in USD Indian Rupee (lot size x pip).
How can I trade USD INR options on the derivatives market
On the pair, you can trade call and option. The difference exchange takes place in INR and there is no delivery of dollars. Trading is European-style. You can exercise the option at expiry or in the middle of the month. The buyer of the call option will gain if the dollar strengthens against the rupee before expiry. The buyer of the option loses on a stronger dollar, but gains with a weakening one.
What about USD INR trading within a futures contract. USD INR can be traded in futures contracts for purchase or sale at a fixed price and delivery on a particular date in the future. Futures contracts are settled in cash, in INR.
Every forex trade uses certain strategies and analyses to help traders decide whether to purchase or sell a currency pair. These strategies typically are based on historical trends, technical analysis and world events.
The price action strategy is a popular trading strategy that depends on whether the bears or bulls are involved in the price action.
Trend trading is another option. This involves traders who rely on trend analysis to identify currency price movements before deciding where to enter.
Counter-trend trading is where traders trade against the trend. Range trading is where a specific currency price range is used to trade. Breakout trading is where traders enter the market when it breaks out from an earlier trading range. Chart analysis is used in position trading and requires a trader with deep knowledge and expertise. Carry trade is when you sell currency with a low interest rate and buy currency with a higher rate of interest.
All of this may seem overwhelming to a new investor at first. Forex trading requires knowledge and skills in order to trade confidently.