COVER SHEET

A STUDY ON FOREX AND INDIAN MARKET

IFMR GRADUATE SCHOOL OF BUSINESS

5655, Central Express Way, Sector 24, Sri City, Andhra Pradesh

Ankit Bajpayee

MBA 2019-21

Roll No. - 015

FOREX MARKET:
The FX market or the foreign exchange market is a market
wherein currencies are traded across geographical boundaries. The currency
market operates 24 hours a day during the business week. The currency market
also known to be the largest financial market in the world and the volume
traded is about 5 trillion a day.
The rise in the global trades has increased the amount of
currencies traded around the world. This is evidenced by the fact that in the mid
1980’s US only imported $5 Billion of goods from China but in 2015 China
became the main source of imports to U.S. with $482 Billion of imports, almost
100 times the value of imports which we saw earlier.
There are three main entities that trade in Forex market:
1. Financial Investors – who buy and sell securities
in the foreign currencies. These constitute the
largest bucket of users of this market.
Banks, security firms and institutional investor\
2. Corporations: Conducting global businesses,
selling goods and services across borders.
3. Traders and Speculators

The currencies in the market are traded in pairs where in units of

one currency is bought/ sold in exchange of units of other currency. The
currency exchange rates can be determined by:
 Floating Exchange rates- which constantly fluctuate
due to the forces of demand and supply as well as other
macro-economic factors
 Pegged Currencies- when one currency locks it
exchange rate to a major currency. For example- US$.
This is usually done to offer the impression of certainty
to business and consumers. They help to foster stability
and control inflation.
The currency value is given in relation to the other currency. For example
EUR/USD, USD/JPY, USD/CHF, USD/CAD etc. The currency to the left of the
given currency pair is known as base currency which is the currency being
bought and sold. Whereas the currency to the right of the slash is quote or
counter currency which is the price paid to buy the base currency.
US$ is the most common currency used to build FX reserves as it is the most
liquid currency. As per Bank for International Settlements, estimates that 85%

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of all FX volumes involves US$.
The forex market starts in Sydney and then moves to each financial center in the
given order:
Tokyo, London and New York.
Bid Price: The price at which the market is prepared to buy a specific currency.
Ask Price: The price at which the market is ready to sell a specific currency.
Spread: The difference between bid price and ask price is known as spread.

LOT SIZE AND PIPS

In the Forex market the currencies are traded in lots i.e. standard, mini, micro
and nano lots. The volume for standard lot is 1.00 (1, 00,000 units), mini lot is
0.10 (10,000), micro lot is 0.010(1,000 units) and nano lot is 0.001(100 units).
Pip (Percentage in points) – It is the smallest numerical movement change in the
Forex market. Generally speaking one pip = one hundredth of 1%. For example
a trader enters a trade by buying a currency at 107.076 and closes his position by
selling the same currency at 110.575, and then we neglect the last decimal digit
and take into account the left out numbers as a whole number. Therefore 11057-
10707= 350 pips.
All currencies move upto 80-120 pips on an average, in a single day.
The three main currency drivers are:
 Changes in interest rates
 Changes in inflation
 Changes in trade

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The values of the above given currencies fluctuate depending on the economic,
social and legal stability in a given economy. The market players such as traders
and speculators take position buy (long) and sell (short) in accordance with the
trends in the market. For example if a central bank decides to reduce its interest
rates, the government bonds yields go down. This deters investment from around
the world, reducing the demand for that particular currency and hence its value
decreases. This is evidenced by the fact that during 2005-2009, the former
president of European Central Bank Jean Claude brought a series of interest rate
hikes leading to euro strengthening against US dollar.
The change in inflation rates also strengthens or weakens a currency. Excess
money supply leads to inflation. When money supply of one currency expands
more than that of another – the former central bank prints more money - the
exchange rate of first will lead to depreciate against the second.
Last but not the least, change in trades also affect the currency demand and
exchange rate.
GDP = C+I+G+(X-M)
X-M in the above given equation stands for net exports. When net exports are positive, it
means the country has a trade surplus and it drives the demand for home currency. While net
exports are negative, it means trade deficit and it will diminish the demand for home

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currency.

Depending on the above given factors, investors and traders take position as to whether they
need to remain in the market for short term entry and exit (trading) or investment for a period
of time (investing). How they take such decisions is covered next.

The decisions are taken based on:

1. FUNDAMENTAL ANALYSIS
2. TECHNICAL ANALYSIS

1. FUNDAMENTAL ANALYSIS
The investors before taking the decision of which stock to trade in, they take into account the
knowledge of some key areas. These are:
a) Classification of Industry –The industry backdrop is the foundation to equity research. It
helps us to ascertain the type of products the company is dealing which differs from one
industry to another. Some companies also operate in more than one industry such as General
Electric which manufactures aircraft engines, water processors etc.
b) Suppliers and Buyers – These form a major constituent of revenues and costs. The
customer (buyers) help us to ascertain the revenue forecasts while the supplier help us to
ascertain that whether there can be any problems related to supply chain, product problems
etc.
c) Revenue Projections – The data pertaining to the same can be found in the company’s
financial model and the company declares its results on a quarterly basis which helps us to
know about the profitability and operational efficiency of the company.
d) The factors of cost (operational, fixed etc.)

The above given factors helps in determining whether a particular security is trading above or
under than their real value. Also the value of security may change abruptly on the basis of a
positive or a negative news either for the company or an industry as a whole.

The above given article is from Hindustan Times as on 9th January 2009 which shows how a
negative news can impact the share price a given security and reduce the investor confidence
in the broader market.

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MACRO ECONOMIC INDICATORS

1. ECONOMIC GROWTH

2. INFLATION

3. UNEMPLOYMENT

4. BUSINESS CONFIDENCE

5. HOUSING

ECONOMIC GROWTH- The economic growth of a country is measured by its GDP growth

in a particular year. The governments also have the discretion of changing the scope and

criteria of GDP measurement.

For example Italy announced the inclusion of black markets in GDP measurement, which

evolved its GDP by

17%. On an average if we look at the world GDP since the year 1964 to 2014, it has grown at

the rate of 8% per year compounded. Also the growth of industries from in the same time

frame was from $2 Trillion to $79Trillion. So the first thing when an investor wants to gain

knowledge about is the percentage change in GDP (YOY) while examining an economy.

GDP breakdown is also an important aspect which helps us to know as to which is the core

segment of an economy. For example China invests 50% of its GDP in building infrastructure

i.e. private investment while on the contrary Denmark spends 58% of its GDP in government

spending. The trade surplus and deficit also plays a role in the fluctuating exchange rates. The

GDP per capita which the measure of prosperity is also a good indicator of how an economy

is performing.

INFLATION- We are aware about the concept of inflation which means shelling out more

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money for the same basket of goods in the present that we paid in the past. There are two

primary sources of inflation:

 GDP Price – This based on the whole economy.

 CPI (Consumer Price Index) – this is based on a representative of basket of goods and

services such as food, housing etc.

Inflation rates have detrimental impact on the foreign exchange rate of a country. A high

inflation rate has a negative impact on the foreign exchange rate as the government to

increase money supply and hence depreciates the value currency. On contrary, the low

inflation rate is also not desirable as it also may lead to the situation of deflation. Hence the

principal goal of world’s major central banks is protect its economy against inflation, and in

the rare cases inflation. The target of a developed economy is to keep inflation at 1% to 2%.

UNEMPLOYMENT – Unemployment refers to individuals who can be employed and

looking for a job but is unable to find the same. There is strong relationship between GDP

and employment. A high unemployment rate does not depict a good picture and hence tells

about the flailing state of the economy. As per the IMF, unemployment rate in the advanced

economies stands at 8.3%. The more the people employed in different sectors it is indicative

of increase in the production of goods and services and hence increase in the consumption of

the same.

BUSINESS CONFIDENCE – The first thing one need to see for any economy is PMI

Business Confidence Indicator. PMI stands for Purchasing Manager Index. It is also the best

leading economic indicator.The statistic was initiated by Institute for Supply Management in

U.S. in the year 1948. The index is published on the first business day of every month.

However the survey includes only private companies and it is indicative of people’s opinion,

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who are in charge of buying goods and services from corporations, about the current as well

as future business conditions. The score ranges between 0- 100 in which a score of above 50

denotes optimism while below 50 is indicative of pessimism.

HOUSING – Leaving aside other assets at a person’s disposal, housing is an important

indicator of the economy well-being. Moving ahead while considering buying or building a

house, people prefer to take housing loans at nominal rates. Also before moving in at house

they also invest in televisions, paints, fridges etc. So the housing sector gives us an idea about

how much is the propensity to save and as well as consume among the people.

TECHNICAL ANALYSIS

Technical Analysis involves study of charts and patterns using various

indicators to analyze the movement in the markets based on the past performance. This
helps the traders as well investors to take a position in the market and formulate a strategy, in
order to make profits. This can be done broadly by using bar chart, candlesticks and line chart
(plotted on the basis of closing prices). However there are 14 popular technical analysis tools:

 Candle Patterns

 Relative Strength Index

 Bollinger Bands

 Simple Moving Average

 Stochastic Oscillator

 Ichimoku

 Moving Average Oscillator

 Commodity Channel Index

 Rate of Change

 Trading Envelopes

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  Williams R

 Directional Movement Index

 Parabolic Studies

 Moving Average/ convergence divergence

CANDLEPATTERNS:

The candlestick pattern is widely used for technical analysis among the traders. A candle
consists of a body, an upper as well as a lower shadow. Each candle represents contains:
opening price, high price, low price and closing price for a particular stock on a given day.

SHADOW

When the opening price is less than the closing price, it means that the market is bullish and there are
more people willing to buy shares at a given price. This is usually denoted by a green candlestick. On
the other hand when the opening price is more than the closing price it means that the market is
bearish and investor confidence is low on the market. The traders usually square of their position in
such a case. It is usually denoted by a red candlestick.

TYPES OF PATTERNS:
1. SIMPLE PATTERN – By looking at only one candle we are able to determine what the trend
of the market is.
2. COMPLICATED PATTERN – By looking at some candles we determine the market
conditions.

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HAMMER

HAMMER

The hammer comes at a point when there has been a decline in the price levels and the
candlestick comes as a bullish reversal pattern. The candle usually has a smaller body and
longer shadow than the body. It usually comes after a downtrend.

BIGBLACK CANDLE

 It is a bearish candle.
 It is also known as ‘Big Red Candle’.
 The price in such case generally open near high and closes near low.
 It is considered to be a reversal pattern.

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 BIG WHITE CANDLE

 In the given candle prices open near and close near high.
 It is a reversal pattern.
 It is also a bullish pattern.

BLACK BODY

 In this candlestick pattern there is no shadow i.e. upper and lower wick.
 Only body is there.
 It is a bearish signal.
 In the given candle, Opening Price = High Price and Closing Price = Low Price.

DOJI

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  As we can see from the above diagram, Doji has no body (it is a ‘+’ shaped
candlestick pattern).

 The opening and closing prices are the same in this candle.

 There are three types of doji: dragonfly, gravestone and long legged doji.

DRAGONFLY DOJI

 It is formed when opening, high and closing prices are at the highest point of the day.

 It is a bearish reversal pattern.

GRAVESTONE DOJI

 It is the opposite of Dragonfly Doji.

 Opening and closing prices at the lowest of the day.

 It has a longer upper shadow.

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LONG LEGGED DOJI

 It has a small real body and it has long upper and lower shadow.

HANGING MAN

HANGING MAN

 It has a small or no upper shadow and a very long lower tail.

 It is considered as a bearish pattern during uptrend.

 It appears at the top (or also resistance).

 It is a reversal pattern.

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INVERTED HAMMER

INVERTED HAMMER

 It comes at support.

 It is a strong bottom reversal signal.

 It is a upside down hammer position.

MARUBOZU

 It is a single day candle.

 It comes in both bearish as well as bullish form.

 When it is a bullish candle (opening price = low price and high price = low price)
whereas a bearish candle depicts (opening price = high price and closing price =
low price) on a particular day.

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SHOOTING STAR –

 It is comes after there is a continuous uptrend in the market.

 It is a bearish reversal pattern.

 The candle has a longer upper shadow with a small shadow.

 However one should wait for the confirmation for the bearish trend with the formation
of the next candle.

PIVOT POINTS
Pivot Point calculation can be done on a daily basis with the average of opening price, high
price, low price and closing price. The pivot point calculation is done on the basis of previous
candle. The given calculation acts as an indicator for the market sentiment on the following
i.e. when the market trades above the given point it means that the market sentiment is bullish
whereas when it trades below serves as a bearish indicator of market.

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 OPEN PRICE + HIGH PRICE +LOW PRICE +CLOSING PRICE
4

Given above are the prices for GBP/USD exchange rate as on 08th May 2020. So to find out
the pivot point for the day we need to find the average of the prices which comes to 1.2392.
The number achieved from the calculation will enable the trader to decide the position they
will take. An intra-day trader would be interested in daily as well as four hours movement in
the pivot point calculation whereas a long term investor will make the calculation for a period
of time.

RELATIVE STRENGTH INDEX

The index is used in technical analysis to clearly define the zones i.e. overbought (equals to
or above 70) and oversold (equals to or less than 30) with the help of percentage of price
changes in the price of a stock. The ranges of RSI lies between 0 to 100.There are certain
parameters one must keep in mind:

 RSI reaches 70, chance of change in trend, thus giving a signal of ‘overbought zone’
and one must sell its position.

 RSI reaches 30, there is a chance of change in trend, thus giving a signal of ‘oversold
zone’ and one must consider entering the market over here.

 If the RSI reaches 70, and sustains its position, it gives the signal that the market
sentiment is still bullish and if it retraces it position from 70(falls below 70) , it enters
into a bearish zone.

 If the RSI reaches 30, and sustains its position, it shows a bearish sentiment. However
if it retraces it position and moves above 30, it is said to have a bullish trend.

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MOVING AVERAGE
It is a technical indicator which is the simple average of the price of stocks over a period of
time. The traders, based on the time frame for which they want to remain in the market and
then Square of their positions make use of this indicator. The generally used moving averages
are 21 days, 34 days, 55 days etc. There are two types of moving averages:

 Simple Moving Average – In simple moving average, the recent price changes are not
taken into consideration. Therefore it is not used by traders, who are in the market, for
a short period of time and are used by investors. In general sense, simple moving
average is the average of closing prices of the stock, for example average closing
prices for 7 days.

 Exponential Moving Average – In exponential moving average, more weightage is

given to the recent price changes. It does account for volatility in the prices of stocks.
Therefore it is used by short term traders to enter and exit their position.

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 EXPONENTIAL MOVING
AVERAGE

SIMPLE MOVING AVERAGE

STOCHASTIC OSCILLATOR
It is a popular technical indicator, the range of which lies between 0 to 100. 80 usually
signifies ‘overbought’ zone whereas 20 is oversold region. When the value is equal to or
above 80, it represents a bullish sentiment whereas when the value is less than or equal to 20,
it represents bearish trend. The indicator usually consists of two lines one reflecting the
session wise oscillator and other the moving average for three days. The intersections of these
two lines are indicative of a reversal pattern. The oscillator is usually helpful when there are
no significant changes in the price and there is a side-wards movement in the market.

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’

FIBONNACI RETRACEMENT INDICATOR

The Fibonacci sequence is a series of numbers which is made out by adding the last two
numbers. The series is as follows as : 0,1,1,2,3,5,8,13,21,34,55,89 and so on. From the given
series, we have got a widely used indicator known as Fibonacci retracement. In this we mark
different levels, such as 23.6%, 38.2%, 50%, 61.8% etc. These help the traders to mark
various levels such as support, resistance, stop loss and take profit.
This helps them to ascertain the entry and exit points.

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The above data window depicts the Fibonacci levels. If we consider the level between 38.2%
and 50%, then 38.2% will act as resistance and 50% will act as the support. But we can see
that after 12th may the trend line breaches the given, so now the 38.2% will act as the support
level and 23.6% will be resistance.

Before a trader or an investor enters in the market, he should be aware of the points i.e. where
to enter and exit as well making profits with limited amount of available resources. We are
going to begin our discussion with the types of order placed in the market.

BOLLINGER BANDS
It is a popularly used technical indicator which helps us to ascertain the volatility of markets
and can also be used in order to mark the support and resistance. There are three lines that are
depicted in the given indicator. The middle line depicts the simple moving average and the
other two lines are the standard deviations from the upper and lower bands. The simple
moving average is usually based on the closing prices of last 20 days.

In the normal market conditions, the candles tend to appear within the upper and lower bands.
But when the market is highly volatile, there is significant movement within the band. Also it
provides the traders, signal to enter and exit the market. For example if the price moves
below the lower band it is an overbought situation and there is a chance of reversal in the
trade i.e. the market sentiment is going to be bullish.

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TYPES OF ORDERS

 Market Execution – The orders are executed in the current market price, without any
delay.

 Limit Order – As the name suggests, limit order provides freedom to the seller or buy
of the stock to buy or sell at a maximum or minimum price. Such orders are
conducted when the criteria for executing the order takes place i.e. minimum or
maximum price is achieved and not before that.

 Buy Limit Order – The given order is undertaken by the purchaser of the stock and
provides discretion to the buyer at a particular price or at a lower price than the
prevailing price. However a trade takes place only when there is a buyer at a
particular price and a seller willing to sell at the same price. So, it is not necessary that
such orders are executed when they are placed and get terminated after a particular
point of time.

 Buy Stop Order – The order is set to execute the trade only at a particular price. It
protects the trader from losses against unlimited losses from a short position.

 Sell Limit Order – In this type of order the trade is executed at the maximum price at
which the seller wants to sell the stock. In this type of order, the trade may be filled or
not, depending on whether the seller gets the buyer at the same bargain.

TYPES OF POSITIONS ONE CAN TAKE IN THE STOCK MARKET

Depending on the market conditions and analysis, the investors and traders in the market
take various positions. They are able to do this either due to technical analysis of
historical price movements or due to some important announcements related to the
fundamentals of the company or the industry, make them take such positions.

 LONG – This means that the trader wants to enter the market and take profit from
the situation. This is due to the positive sentiment they are having about the
increase in the price. The traders usually enter the market when price is at the
support level and they expect a reversal.

 SHORT- This means that the trader wants to square off his/her position by selling

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 the shares in the market. The traders usually sell their shares when they do not
have confidence that prices will increase and they have a bearish sentiment about
the market. The traders usually sell their stocks when there is a reversal from the
resistance level.

 TAKE PROFIT - The traders enter the market to earn return on investment
which is higher than what they would have earned in the fixed income securities
(investment in post office, savings account etc.) The given situation arises when
the stock in which the trader has invested has grown as per the expectations of the
trader thus giving the desired results.

 STOP LOSS - In order to get protection from making losses due to a major fall in
the share prices, the trader keeps a stop loss to avoid the situation. After a
particular minimum price is triggered the trader sells the share in the market.
CAVEAT- When a trader buys the [shares; the trader keeps the stop loss below
support level whereas while selling the shares, the stop loss is kept above the
resistance.

INDIAN STOCK MARKET

The Indian Stock Market consists of two major exchanges:

 NSE – National Stock Exchange

 BSE – Bombay Stock Exchange

In the Indian market, there is buying and selling of shares of different companies. The stock
market is appealing is it provides ownership in companies and opportunity to earn good
returns by picking up the correct the companies. The shareholders are entitled to the earnings
which are left over after all other claims are made.
INDICES
Indices are a basket of stocks which work in a similar way to the inflation baskets. There are
75,000 indices in the world. The indices are useful in monitoring the market movements. For
example S&P 500, the equity index for U.S. accounts for about the quarter of whole world’s
market capitalization.

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INDEX WEIGHT
The size of stocks helps in the determination of whether it should be in or out of the index.
Also it helps in ascertaining how much does it contribute towards the movement in the stock
index.
Index Weight =
Market Capitalization of One Stock
Total Market Capitalization for all Stocks in Index

NSE – It is the leading stock exchange which came into the picture in the year 1992 is a
weighted average of top 50 stocks. That is the reason it is widely known as Nifty 50. It is also
the world’s second largest stock market in terms of number of equity shares traded. It is a
derivative market. There is a lot size in the futures contract and they usually have 3 months
contract after which they expire. The lot size for Nifty is 75 units.
BSE –The BSE was established in the year 1875 and is currently located in Dalal Street,
Mumbai. It is a weighted average of top 30 stocks in the market and it is also known as
Sensex. It is a cash market. There are no future contracts traded in this market.

NCDEX – It is the National Commodity Derivative Exchange. It came into existence as

public limited company in the year 2003. It is regulated by SEBI (Securities and Exchange
Board of India). It helps the traders to trade in future contracts for 21 agricultural
commodities.

MCX - MCX stands for Multi Commodity Exchange. The commodities traded are gold,
silver, aluminum, lead, zinc, copper etc. The market timings are 9 a.m. to 5.30 p.m.

LEVERAGE
To encourage trading by intra- day traders, leverage is provided by the brokers. The leverage
provided is therefore dependent on the brokers. 1:100 leverage means that for every Rs. 1
capital invested by the trader, he can make a trade of Rs. 100 in the stock market.

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 CONCLUSION
The stock markets are volatile in nature and one should make proper analysis before entering
them. The shares of a particular company which may seem very lucrative or a currency which
has been doing well may suddenly lose its value due to reported losses in its quarterly results
or due some unforeseen activity in the economy. For example, Japan’s economy underwent a
boom in 1980’s from around 40,000 in 1990 to 18,700 in 2015. This led to Nikkei loose its
value.
The traders as well as investors should be completely aware of the entry and exit points in the
market in order to minimize their losses by clearly marking the stop loss, take profit levels
etc.

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 ACKNOWLEDGEMENT

I thank J MARATHON ADIVSORY SERVICES to continue our internship for in these

tough times and it gives me immense pleasure that I had an opportunity to work with such
devoted people. A special mention is for Sai Sriram Viswanadha and Megesh M; our mentors
guided us throughout our internship program and kept us motivated.

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