Guide to Forex and Currency Trading | #Learn2Trade Session 11
Welcome to session 11 of Learn2Trade series. I am Vivek Bajaj and I’m teaching you trading in simple words Trading is a very noble occupation and I keep repeating that if you’re set in it Then your life will be good But if you get trapped in it and become Abhimanyu Then your generation might get destroyed Select your trading career very carefully Learn, understand and then get into it This series is trying to give you power to form your base at the grassroot level As you know Annapurna has joined me in this series How are you? I am good sir. How are you? All well We have decided to record early morning today. Start fresh with full energy We discussed commodities in the last 2 videos You might be thinking why did we have 2 sessions in commodities What’s there to learn in commodities You should aspire to become a multi asset trader when you want to create a career in trading A multi asset trader is someone who knows equity, commodities, currency, and bond Each market has its own time. Have you listened to that song ‘Apna time aayega?’ Market also has a time. Sometimes equity, commodity or currency has a good run Do you know the reason why? The market moves up and down due to a lot of factors that is not under our control.
Definitely. What is the mother of all factors? Global markets Global markets can be anything, either equity, commodity or currency Mother of all markets due to which each market runs at its own time Like commodities is moving for past some years It paused for sometime in between Currency moves for sometime and then pauses What is the mother of all factors? Let me answer The mother of all factors is cycles. Business cycles Business cycle has its own run At one stage of business cycle, one type of asset class works At a second stage of business cycle, another type of asset class works Interest rates influence business cycle. If the interest rate worldwide is down, then a separate asset class works If the interest rate worldwide is up, then a separate asset class works That’s why as a trader it’s important for us to learn about all asset classes We have talked about basics of equity in the first 7 to 8 sessions Hence I dedicated the 9th and 10th sessions to commodities I know a lot of people gave the feedback to be fixated on equity You gave me the feedback that a lot of people have commented it on our video You need to understand that there will be some logic behind my action One of the most impactful strategies that work in the market is By tracking the price of commodities to trade in the stocks related to those commodities Eg., if copper goes up or down, then it will impact the Indian companies related to copper There is a lag effect sometimes. First the commodity reacts, then it impacts the stock Iron prices have been going up in the past 4 to 5 months worldwide.
Prices of iron and steel was going up First, the prices of iron and steel went up and then it impacted SAIL, TISCO You get an advantage when there’s a lag, if you’re working in this strategy My objective to teach you about commodities was to make you understand this relationship You might get an opportunity to trade in commodities anytime Or you can trade in equity be tracking the prices of commodities We will discuss a strategy to club commodity and equity to figure out a strategy. We are discussing very basics now. We will discuss each strategy So that you can cherry-pick your own strategy I have a question sir. You spoke about interest rate
Can we discuss how does it impact the stock market? If the interest rates are low, then it means that the money is available in abundance If the interest rates are low, then it means that the money is available in abundance Because of law of economics If the money is in abundance, it will go to multiple assets Commodity is also a part of the multiple asset Whenever the interest rate is low, the money goes to the multiple assets An asset bubble is created overall, including commodities as it’s a part of asset Which interest rate are you talking about? When we say interest rate, we mean bank rate, the rate at which banks can borrow money from the central bank Fed decides the interest rate for bank borrowing in US RBI decides the bank rate in India When will there be money in the system? When the banks borrow money from the central bank And distribute it to people at a cheap rate Sometimes this action is used as a stimulus by the Government If there is a tough scenario around, more money is printed So that it’s distributed at a cheap rate amongst the people People will consume if they get money in hand leading to an increase in the economic activity Covid is a good example. As soon as covid hit, central banks worldwide decreased the interest rate Leading to an increase in money supply. Consumers got money in hand Which they later invested in the financial assets So the money was invested both in real assets and financial assets, Leading to an increase in the prices of commodity, equity and other financial assets Today we will discuss about another financial asset We will return to equity later Today we will talk about forex Forex? Foreign exchange. What is forex? The rate at which we exchange the currencies. Whenever you travel outside India, you need to carry the currency of the foreign country So you give money to your foreign exchange dealer and ask him to exchange it for XYZ currency Typically which currency do we carry? Dollars. Why? Why do we carry dollars if we’re travelling to Europe? As it’s widely used. Exactly. Dollar is type of a global currency
If you take dollar from India and exchange it in the foreign country for the local currency The change of currency will be cheaper vis-a-vis if you directly carry the currency If I’m travelling to Europe, I’ll need Euro. Euro vs INR is not as much traded in the spot market as dollar vs INR Price will be more efficient where there’s liquidity. There’s no price efficiency in the illiquid market You’ll carry in dollar terms and convert the dollar to the respective currency This is your spot need. Spot need is when you need dollar and go to an authorized dealer
Authorized dealers are all RBI appointed. Typically all banks and forein exchange dealers Who are RBI-authorized. You go to them with cash/cheque and get foreign currency in exchange That is the spot market process Suppose you’re an importer and you have a business of import And your import consignment is due after 1 month. You need to pay when you get the delivery You won’t pay earlier, you might pay an advance.
But typically you’ll make the payment when you get the goods. But if you need to pay in that currency after a month, you’re carrying a currency risk That if the other currency becomes strong, you might have to pay more money Let’s discuss the concept of currency becoming weak and strong One of the component of forex is currency When we say that rupee is getting strong. It means the value of rupee is increasing against the dollar Who said against the dollar? You presumed that it’s against the dollar Rupee can be valued against the dollar, euro, pound, australian dollar, canadian dollar.
Any currency vis-a-vis rupee will have its own exchange rate. If I see today the exchange of rate of rupee vis-a-vis US dollar is 72.75 Can you see it in the sceen? I have logged in to the tradingview screen You can see the current rates in market summary US dollars vs INR is 72.75. What does this mean? It means 1 dollar = Rs. 72 72 rupees and 75 paise. Similarly EUROUSD is 1.19 1 dollar = 1.19 euro. Opposite as USD is later here
You were correct here. 1 dollar = how much rupee is this This is 1 euro = how much dollar? Then there’s GBPUSD. It means how much dollars is equivalent to 1 GBP Here USDINR is 72.75, it means that you need to pay 72 to get 1 dollar
Logically, which currency is stronger? Dollar or Rupee? Dollar As you have to pay more money to buy 1 dollar So dollar is a heavier currency. In the case of EUROUSD, the meaning of 1 euro = 1.19 dollars Is that euro is a heavier currency. If the EUROUSD becomes 74 from 72 It increases to 74 from 72.76, does it mean that rupee is getting stronger or weaker?
It’s getting weaker, as rupee is up to 74 from 72 And now you need to pay 74 to buy the same 1 dollar. Means rupee is now weaker Let’s go back to the importer example. Today its price is 72.77. You understand hindi? Yes Its price today 72.77 and you’ve booked an import assignment which will be delivered after 1 month If this 72.77 becomes 74 after a month, will you bear a loss or profit? Loss What will you do to hedge the loss? Buy a future contract before hand? Exactly You will book a forward or a future contract before-hand Will you get a forward or a future contract at 72.77? No Why will anyone give you the contract at the current spot price? You want the price post 1 month So I will charge you a bit extra. If the spot is 72.77, then will the future price be higher or lower?
Logically it should be higher. This is the basic discussion on currency The question that arises is how do we assess if this 72.77 can become 74 or not? There can either be a fundamental assessment or a technical assessment Fundamental assessment implies that you need to study all those factors that can Influence USD and INR. I have broken USDINR into 2 parts There will be a lot of factors that are INR dependant, and a lot of factors that are USD dependant Will the US political scenario impact USD or INR? USD India’s political scenario will impact INR. the movement in the Indian stock market will impact the INR The US stock market will impact the dollar There are different set of factors for both and you can only estimate the activity of a currency after doing permutation and combination of those factors Just imagine, a number tells you the equivalent point after comparing 2 economies As it covers economic performance, unemployment, interest rates and all those factors that define a country INR defines India, and USD defines US and 72.76 is the parity price of both combined It’s more of fundamental where you need to identify each factor and estimate the outcome of that factor It’s a marathon task. We loosely use the term that USDINR is 72.76
Have you ever thought about how complicated is the machinery that computes this price? It’s difficult to fundamentally make a judgement. Even I can’t make it If you ask me what do you think about it fundamentally, I can make some wild guesses But I might not be the right person as there are big economists sitting for it The best way to make a judgement for us is technical. What is technical? Studying the price behaviour and the propensity of buyer and seller There are strong and weak people in the share market Same with currency. Who is the heavy player in currency? The biggest player in currency is the Reserve Bank of India It’s important to track its movement The reason that I am saying this is as each country has a currency regime Some countries follow a fix regime that their currency is tagged with the US dollars at a particular price Like Dubai, which currency do they have? Dirham Dirham is pegged with the US dollar It means that if the dollar goes up, Dirham will also go up in the same fashion Exact 100% correlationship as it is pegged with a single factor Second regime is more of a range pegging and not 1 price. Like China China’s currency is pegged in a range with dollars. That it will move in a range, if the dollar moves Third is the floating regime, not fixed, where the currency moves independently INR and dollar have their own movements but the Reserve Bank keeps intervening in between To control this movement This is known as dirty regime India follows the dirty regime which means that Reserve Bank is allowing it to move as per its wish Move as per the buyer and seller but activates itself if they think that the volatility is increasing It will either start buying at a point so that the market doesn’t go down Or start selling so that the market doesn’t go up a certain point The biggest player in the Currency market is the Reserve Bank of India The second player are the banks. All big banks are active in currency
If any importer/exporter want to buy or hedge currency, then it approaches the bank first If you want to pay for the import, export in the international market, then you have to pay through the bank You cannot transfer the money directly. So the bank is 2nd biggest player in the currency segment 3rd are the big corporates who have large import/export bills Like Reliance, they import and export a lot. So they control the currency market Then there are small importers and exporters, then speculators and then there people like us Who trade in small amounts Have you understood the dynamics of USDINR? I have a question You said that there are 3 strategies that the countries follow 1st is the fixed one, 2nd is the range one, 3rd is where the regulator controls it, like in India Why do we follow that? It’s not a strategy, it’s called regime Our Indian Constitution has fixed some rules, so it’s a regime which we are following RBI is a supreme monetary authority of India which has been established under the act of the Parliament To do certain things and maintaining the financial stability of our country is one of the objective of RBI They have decided to follow this regime in India They have decided to follow this regime in India But we will intervene. It’s called Open Market Operations RBI comes into the market, does open market operations, stabilizes the market and runs Are there any benefits to it? Of course. Since RBI’s role to control the fluctuations in currency
RBI does not say that I will not let 72 become 80. Who is RBI to say that it will not make it to 80. It can be 80 If economy comparative to other economy is performing in a certain way, then 72 can become 80 RBI does not have a problem with it. It says that 72 must not become 80 with a sudden spike It should become 80 with a gradual increase Otherwise, the importer or the exporter will not be able to work properly Let’s come to a path. I had shown USDINR, then EUROUSD, GBPUSD, etc. Your question should be how do I trade in it. Ask me this question
How do I trade in currency? If you’re a retail investor and you want to trade, then you can trade in USDINR As it’s listed in the Indian Exchanges. USDINR, EUROINR, GBPINR, JPYINR are all listed Any currency in the form of INR and with INR is listed in Exchanges as a futures contract If I want to trade in USD and JPY then I can’t If you want to trade directly in USDEURO for example. There’s a clear circular by RBI that you cannot trade in any forein currency using any website A lot of websites like iforex lure people to use their platform for currency trading People pay using their credit card to trade. This is strictly illegal No one should trade in the foreign currency using these websites You have these 4 instruments. Suppose you want to trade in EUROUSD
But you have USDINR and EUROINR and you want to trade in USDEURO How will you do it? I’ll have to compute It’s simple maths. Buy one and sell one, so INR get cancelled by itself, you’ll be left with USDEURO If anyone wants to trade, there are contracts listed in Exchanges. You just need to cross it Cross currency is a concept where you can trade any currency with other currencies If you learn the mechanism of crossing it Can we see the mechanism? It’s very simple. Let’s go to NSE’s website where currency is traded You might ask if you have to open another account with the broker You can trade in currencies through the same broker account Tell your broker to give the access to currency You can ask for access to commodity, just like you asked for the currency Is there a lot size in currency as well? Yes Whenever you’re trading in any contract, check the contract specification in the exchange’s website Let’s go to currency in the NSE’s website Let’s go to the old one as this new website is very complicated Are you finding it interesting? Yes sir There are currency derivatives under products Currency segment in NSE is large, even the BSE’s currency segment is big You can trade in the NSE’s currency segment. It doesn’t matter much If I go to live to see the currency derivative, the market is closed today Hence you can’t see anything USDINR, EUROINR, GBPINR, JPYINR are all listed here. Even the EUROUSD is listed
Direct contract was launched but didn’t pick up, so you need to cross How do you cross it? Exchange’s website is slow today. Let’s go to BSE We will check it in BSE, if this is slow. This website is also very complicated but I will try my best BSE’s website is quite heavy. Can you see this in currency derivative? USD 21st of March. It means the price of USD contract that will expire on 21st of March is 73.14 Let’s click on it.
The market is closed today. You can see the expiries available of USDINR Under currency futures, 26th March, 28th April, 27th May, 28th June 12 months contract are available in currency These are all month-end contracts. 12 month contracts are available in currency And these are month-end contracts, the contracts that are going to expire in the end of that month You will need to check expire methodology under contract specifications But that’s not our objective. The objective of our discussion is that
Best trade in USDINR, if you want to trade in the currency derivative. Start with it Then trade in EUROINR if you want to trade in EURO Most commonly traded instrument is USDINR, so let’s focus on that How do you trade in it? If you choose the NSE currency segment in the broker’s terminal and select USDINR You will get the contracts. 12 contracts are available, one for each month You’ll trade in near month contract How do you trade? Through charts Let’s open the chart You will get the USDINR chart in TradingView. Let’s search for USDINR This is the spot market rate of USDINR which is provided by different agencies But more or less, the rate is same. This is USDINR’s chart. Candlestick chart
Let’s convert it to line, since your class on candlestick is still pending. Let’s check the line This is the daily chart of USDINR. I’ll convert it to monthly, or rather weekly This is the weekly chart of USDINR. What is your opinion on it? This is in consolidation now in the short term I have drawn a simple trend line, support here, then another support, it fell down Then it finally comes down after going up in between It means that this is the resistance. So 73.94 is its resistance
This is the support, i.e., the demand zone What is the range of the currency now? From 72.50 to 73.94, i.e., 74 This is its range. It will move in this range till it gives a breakout or breakdown Then it might show a big movement I thought we plot demand zone and supply zone by checking 2 to 3 points Agreed, it’s a valid point. We can see the demand and supply zone points You have a valid point. I selected it as it was on that price for some time There are 2 points here. It was at this point for 2 consecutive days
Hence I fixed this, and this is a weekly chart. If I change it to daily, then I will get those 2 to 3 points There is a point here and here. There is no buying or selling at one point. It’s a zone, more like a range Whenever you’re identifying a zone, then see the range near the demand and the supply It’s not necessary that you will get exactly 2 points But you’ll understand that near a certain price, there are enough buyers Like we formed a view on equity after drawing a chart Similarly we formed a view on currency through basic chart There’s a very big advantage of trading in currency Whenever currency breaks a high level, it gives a big movement You’re not required to trade in currency everytime Identify the big level and wait. Why is there a big movement when it breaks a high level? Even the RBI is alert, and whenever there is a big movement, it runs to square up its trade Even the big importers and exporters come into the market to build their position When a lot of people jump at a price point, the market reacts quickly This reaction from 72.20 to 73.91. This was a day’s reaction As people who had short positions, ran to square up their positions Typically who squares up the positions? Either an importer who is afraid and getting their import delivery And the currency looks weak, so let’s buy it quickly So a lot of importers came into the market to square up the position Lookout for key levels in the currency. You should participate when there’s a breakout in a level
You can’t participate all the time I had another question. Can we do intraday in it? Yes we can The market is live from 9 am till 5pm in the evening You can do intraday, but you don’t get a lot of movement in intraday You’ll get an opportunity to trade in range, if you don’t get a movement in intraday Let’s look at the 30-minute chart for intraday You will see a range in the 30-minute chart. This is the currency’s advantage Equity and commodity move in one direction.
The advantage is that you earn a lot when it moves in one direction The currency generally moves in a range. See the range here When it breaks this range, it creates a new range Someone with a weaker heart and want to start trading then currency is actually not a bad idea As it gives you an opportunity for regular entry and exit vis-a-vis equity In equity, there is one big movement, it consolidates for some time and then there is a new bog movement But the consolidation period is far longer in currency than equity. It’s lesser risky Hence the margin requirement in equity is less When you want to take a position in currency futures, you’ll have to pay a certain margin There is 25% to 30% margin in equity. If you’re buying a lot in equity with a minimum value of 5 lac
With a 30% margin, you should have 1.5 lac. The margin in commodity depends on the commodity But generally there is a margin of 10% to 15% There is only 4% to 5% margin in currency It means that you can make a position of 1 lac with just 4000 to 5000 The lot size in currency is 72750. The price multiplied by 1000 is the lot size As 1000 is the currency’s lot size. This price into lot size
So if I see a 5% margin on a lot size of 72000, you can work with a Rs. 4000 margin Which is reachable for people like you, who have 40000 to 50000 rupees in the bank account And do not want to take a lot of risk. Currency is a better way to start for them I had told you that the application of Law of Economics of demand, supply Price moving up because demand is high and all Its most applicable in currency and commodity as the efficient market hypothesis work better in it As everyone believes that the movements are all correct As everyone questions the price movement in equity, trying to fool them As a youngster, it’s not a bad idea to start with currency, start with maybe 1 commodity Trade with small amounts, as you can trade in small amounts in these instruments Then graduate to equity, derivatives, etc. There is no fixed amount of commodities, bet there are a fixed free float share in equity There’s no fixed free float in currency There is a fixed open interest allowed by the exchange, but it’s huge There’s no fixed float. All the INR that has been printed till now, technically we can trade in all of it
That is a huge number. Hence the law of Economics work better there As there’s no fixed float, so the chances of manipulation are less There are many people and a lot segments Until and unless RBI manipulates, which is not a manipulation It’s an open market operation. Whenever RBI is there to trade, a lot of demand gets generated at that price As RBI generally buys at one price. You will be able to see that RBI is there How? Is it by checking the towers in the end? By observing the simple line, straight line, demand zone and supply zone you’ll get to know If there is continuous buying at one price. Like this price. See this
It keeps going up from this price. Maybe the RBI is here at 72.80 So you know when this price goes down, the RBI has removed its support It means that you might get a downwards movement, which we got here Technical analysis in the most simple manner works best in USDINR Isn’t it exciting? What we need to see is that this is USDINR So the dollar movement will also impact it. So we need to track dollar as well as a trader in USDINR We need to track the dollar index to track the dollar So ideally your chart template should consist of dollar index As the dollar index impacts movement in equity, bond, currency It’s the mother. If you track that, you’ll get idea of equity, USDINR, gold So eventually you become a multi asset trader Is there anything like a Rupee Index? No There’s only dollar index. Rupee is with either USD, or any other currency
There’s no rupee index. Exchanges wanted to create a rupee index and trade it in the exchange But as far as I know it’s not formed yet. Hopefully exchange creates one after listening to you Will you start tracking USDINR? Yes, I will start tracking it atleast. I’m not sure if I trade or not I will also cover this in the next video This is very important and the reason that I am teaching you this I have some sense and that’s why I’m teaching this to Annapurna A strategy that works in the market is the link between commodities and its stocks Similarly there is a linkage between dollar and import and export Even that’s a strategy which we will learn later How can you trade in the stocks which import and export a lot through the dollar movement Similar like in commodity. Hence it’s important to track all All professional traders are tracking it and you’re weak if you’re not tracking it Your information measurement will be weak if you just keep tracking 1 stock You start tracking it. So gold, crude oil in commodities, USDINR and Nifty and the stocks in equity Keep tracking it. You’ll form a relationship with these over a period of time
We need to understand the cause and effect as a trader. What effect can an activity have And we get the opportunity to earn if there’s a lag This is a small session on currency. I hope you liked it A lot of sessions are pending and we will record a session on how to trade in equity through currency Observe the currency segment in the exchange and start tracking it. Don’t take it casually As a lot of times currency notifies the future activity of the market before-hand Thank you for watching this video and series You’re not doing right by not sharing this series Keep sharing, comment and like and spread this free education initiative Thank you friends. Bye