What is the forex market? Currency trading explained for Indians

The forex market, short for foreign exchange, is where one currency is exchanged for another. Every currency is priced in terms of another currency, so forex is always traded in pairs, such as USDINR or EURUSD. It is the largest financial market in the world and runs around the clock on weekdays. For Indian residents, the only legal way to trade it is through INR-pair currency derivatives on recognised Indian exchanges such as NSE and BSE; overseas forex brokers and margin forex trading through LRS are not permitted by RBI.

How the forex market works: currencies trade in pairs

In the video, Vikas starts with daily life. You get up, you go to work, you do your business. Countries do the same with each other: they export and import. And every time goods cross a border, money has to change form.

His example: an Indian business orders a product from the USA worth 1,000 dollars. The seller wants dollars, not rupees. So the buyer goes to an authorised dealer, a bank or a money changer, and exchanges rupees for dollars. If the dollar is at Rs 85, the buyer pays roughly Rs 85,000 for the 1,000 dollars. That exchange is a forex transaction, and millions of them happen every day.

The rate at which rupees become dollars, 85 in this example, is a price. And like any price, it moves with supply and demand. When India imports more, or foreign investors sell Indian shares, demand for dollars rises and the rate goes up. When exports or inflows are strong, the rupee strengthens and the rate falls.

That is why forex is always quoted as a pair. There is no such thing as the price of a dollar on its own. There is only the price of a dollar in rupees, in yen, in euros. In USDINR, USD is the base currency and INR is the quote currency: the number tells you how many rupees one dollar costs. The term is explained in the glossary under currency pair.

How big is it, and who is actually trading

Vikas describes forex as an enormous market, with several trillion dollars traded per day. The Bank for International Settlements, which surveys the market every three years, put daily turnover at about 7.5 trillion dollars in its 2022 survey. That is many times the daily value of all shares traded on Indian exchanges combined.

Who makes up that volume matters, because it tells you who you are trading against:

• Large banks, which quote prices to everyone else and trade among themselves.
• Companies that import, export or have overseas operations and need to convert cash flows.
• Central banks, including RBI, which buy and sell to manage reserves and reduce sharp swings.
• Investment funds moving money between countries.
• Retail traders, who are a small slice of the total.

The scale is why forex is so liquid: there is almost always someone on the other side of a trade in a major pair. It is also why nobody, including a retail trader with a laptop, moves the price. You are a passenger in this market, not a driver.

What the quotes mean: pairs, pips and lots

A forex quote has three pieces a beginner needs.

The pair tells you what is being priced in what. USDINR at 85.2500 means one dollar costs Rs 85.25.

A pip is the smallest standard step in the price. For most pairs it is the fourth decimal place. On NSE, USDINR moves in ticks of 0.0025, a quarter of a paisa.

A lot is the standard trade size. On NSE, one USDINR lot is 1,000 dollars at the time of writing; the exchange can change this, so check the current contract specification.

Vikas also mentions that in international forex, gold is quoted as XAUUSD and silver as XAGUSD, priced in dollars. That is a useful thing to know for reading charts, and not an invitation to trade them offshore, for reasons covered below.

A worked example in rupees

Say you buy one lot of USDINR futures on NSE at 85.2500. You now control 1,000 dollars, so each 1 paisa move (0.01) is worth Rs 10 to you, and a 50 paisa move is worth Rs 500.

If the rate moves to 85.7500, you are up Rs 500 before charges. If it falls to 84.7500, you are down Rs 500. The margin your broker blocks for that one lot was a few thousand rupees at the time of writing, which means a Rs 500 loss can be a large percentage of the money you actually put up. That is leverage, and it is the main reason currency trading can lose money fast despite the small numbers involved. A full example with position sizing is in currency trading in India explained.

What Indians can legally trade

This is the part most YouTube videos skip, and it is the part that matters most.

For an Indian resident, forex trading is legal only through currency derivatives on recognised Indian exchanges: NSE, BSE and the Metropolitan Stock Exchange (formerly MCX-SX). The pairs available are INR pairs: USDINR, EURINR, GBPINR and JPYINR. You trade them through a SEBI-registered broker, in your normal trading account, under SEBI and RBI oversight.

Trading through overseas forex brokers, the MT4 or MT5 apps advertised on social media, is not permitted for residents under the Foreign Exchange Management Act. Sending money abroad for margin trading is not an allowed purpose under the Liberalised Remittance Scheme (LRS). RBI publishes an alert list of platforms and entities not authorised to deal in forex in India, and it is updated regularly, so check the current version on RBI's website before believing any broker's claim of being "legal in India". The full picture, including consequences, is in is forex trading legal in India.

In practical terms: everything in this lesson about pairs, pips and lots applies to USDINR on NSE. That is the market an Indian beginner should be learning on.

Demo accounts and why most people lose

Vikas makes a point in the video that applies to every market. Making money in a demo account is not the same as making money with real funds. In a demo, a loss is a number. With real money, a loss is a feeling, and the feeling changes your decisions.

He is also frank that the great majority of people who trade, in any market, lose money, and that the small minority who keep their capital do so because of experience, patience, study and time spent watching the market. SEBI's own studies of Indian retail derivatives traders point the same way, with roughly nine in ten individual traders losing money in the periods studied. Forex is not an exception to this. If anything, the leverage makes it harsher.

None of this means currency trading is bad. It means it is a skill, learned slowly, on a legal venue, with money you can afford to lose.

Common mistakes

• Believing a currency has a price on its own. It only has a price against another currency; always ask "against what?"
• Opening an account with an overseas app because an influencer showed a profit screenshot. It is not permitted for residents and there is no complaint route if the money disappears.
• Assuming forex is easier than shares because the numbers are small. The lots and leverage make each small move large.
• Treating demo results as proof. They prove you understand the platform, not that you can handle a loss.
• Not checking which exchange and which broker. If it is not a SEBI-registered broker on NSE, BSE or MSE, it is not the legal route.
• Skipping the basics. If you do not yet understand a share, currency derivatives are not the place to start; read what is the share market first.

Key takeaways

• Forex is the exchange of one currency for another, always priced as a pair.
• It is the world's largest market, dominated by banks, companies and central banks. Retail traders are passengers.
• Quotes move in pips; trades are in lots; leverage makes small moves matter.
• For Indian residents, only INR-pair currency derivatives on NSE, BSE and MSE are legal. Overseas brokers and LRS-funded margin trading are not permitted by RBI.
• Check RBI's current alert list before trusting any platform.
• Most people who trade forex lose money. Learn on the legal venue, with small size, before anything else.