Currency Trading and Its Benefits---

To exchange one currency for another currency is termed as currency trading. This industry is one of the largest in the world with regards to trading volume. Because of small lots, everyone can participate in this market.Margins levied are even lower than for gold in commodity futures. Currency futures are the most liquid of markets. 

Importers and exporters use currency futures to hedge foreign currency exposure. Some of the business from the OTC (over-the-counter ) market controlled by banks will be transferred to the currency futures markets.

Transparency and liquidity will ensure that companies with exposure of less than US$ 5 million find the currency futures markets much friendlier. But what’s in it for you? Why should an ordinary investor be interested in currency futures ? 

What’s in it for you

Let’s say you bought a kilo of gold on the commodity futures exchange at Rs 11,000 per ten grammes. So you paid Rs 11 lakh, plus an exchange specified margin of about 4%. You’re betting gold prices will go up—in rupees.

But in fact, gold prices depend on international gold prices denominated in US dollars. So you’re really betting gold prices will go up in global markets.

If the price does go up from, say, $700 per ounce to $707, you’d expect a gain of 1% in rupees, too. But in the meantime , if the rupee appreciates against the dollar, from Rs 42 to Rs 41.50, your dollar price gain is effectively wiped out.

The rupee price of gold may remain roughly the same. So if you trade a commodity with international pricing , it makes sense to take a position on currency futures markets.

Currency is an asset class

Currency is an asset class, like equities , commodities or art. It’s favoured worldwide for its ability to re-price other assets. The currency futures market is your ticket to universal asset allocation .

Benefits of Currency Trading vs. Equity Trading

1.Continuous, 24-hour trading: The currency exchange market is a true 24-hour market, operating five days a week. Equity trading, on the other hand, is restricted to the operating hours of the various equity exchanges.  

2.High liquidity and greater efficiency: Trading volumes in the currency market can be one hundred times larger than that of the New York Stock Exchange. High volumes and “round-the-clock” trading ensures an active market for currency traders and greater liquidity.

It is virtually impossible for an individual or group to manipulate prices. Compare this to the equity markets, where large price movements can be triggered with no warning .

3.No commissions or transaction costs

4.Intra-day volatility : The high volume and liquidity combined with fewer active instruments generates greater intra-day volatility than the equity markets where hundreds of stocks are actively traded. 

5.Low spreads:Currency trading offers spreads that are much lower than what can be obtained when buying or selling equities, especially during after-hours trading. 

6.Margin-based leverage:Leverage—or margin based trading—makes it possible for FX market participants to submit trades valued considerably higher than the deposits in their trading accounts. Typically, margin ratios for trading currencies are higher than those permitted for equities, and this is primarily attributable to the higher level of liquidity within the currency markets.

 7.Profit potential regardless of market direction:No matter whether you buy or sell a currency pair, however, every trade you make involves the buying of one currency and the selling of another. Therefore, potential exists in the FX market regardless of whether the market is moving up or down.

Short-selling is much less common in the equity markets and there are many rules and regulations that you must abide by when shorting stock. This can make it difficult for you to take advantage of a declining share price or market trend. These same restrictions do not apply to the FX market, thereby allowing you to gain no matter which direction the market heads.