How to start trading NDFs

The interest of people in trading forex is increasing. Let’s understand how currency trading works with examples, its popular terminologies & how to start.

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NDF is one of the most popular ways to trade in currencies and is widely used in countries where forex trading is banned. In this article, we will learn the concept of trading NDFs with examples and its key benefits. 

What are NDFs?

Non-Deliverable Forward or NDF is a financial derivative to trade in a range of currency pairs and make huge profits.

Under this method, two parties enter into a forward contract to exchange the difference of currency value fluctuation at a future date.

The settlement takes place in cash instead of physical delivery. Generally, the time frame of the contracts is from a month to a year.

What is NDF Trading?

NDF trading is the process of buying and selling NDF currencies to take advantage of their exchange rate fluctuation without physically owning them.

Under this, two parties agree to take opposite sides at a specific amount at a contracted rate. The counterparty settles the difference between the contract (agreed upon) and the spot price (at the time of settlement).

Let us have a look at the NDF trading example for a better understanding. Suppose you think that the value of the Japanese Yen will rise against the US dollar, and a party feels that the value of the US dollar will rise against the Japanese Yen.

So you both have entered into an NDF contract for one month, and the contract size is 10,000$. The agreed-upon exchange rate is 100. After one month on the maturity date, the prevailing exchange rate of the JPY/USD pair is 105.

It means that your prediction went right, and the other party will pay you the difference in cash. So you will earn a profit of (105 -100)*10,000.

What is NDF Trading?

NDF trading is the process of buying and selling NDF currencies to take advantage of their exchange rate fluctuation without physically owning them.

Under this, two parties agree to take opposite sides at a specific amount at a contracted rate. The counterparty settles the difference between the contract (agreed upon) and the spot price (at the time of settlement).

Let us have a look at the NDF trading example for a better understanding. Suppose you think that the value of the Japanese Yen will rise against the US dollar, and a party feels that the value of the US dollar will rise against the Japanese Yen.

So you both have entered into an NDF contract for one month, and the contract size is 10,000$. The agreed-upon exchange rate is 100. After one month on the maturity date, the prevailing exchange rate of the JPY/USD pair is 105.

It means that your prediction went right, and the other party will pay you the difference in cash. So you will earn a profit of (105 -100)*10,000.

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How to start trading NDF

Non-Deliverable Forward can be a popular choice for beginners, especially for traders interested in the forex market. Here is a step-by-step procedure for trading in NDFs. It will help you in starting your NDF trading journey.

Learning

The first step to trade in NDF is to get yourself well versed with the currency market, as NDF is a product to deal with currencies. So get yourself well versed with forex trading, its functions, features, strategies, and market conditions.

Also, get an in-depth understanding of NDF contracts and terminologies like spot rate, prevailing rate, contract size, settlement date, etc. It will help you clear your basics and place trade effectively using NDF contracts.

Identify currency pair

Once you have grabbed the knowledge of trading in NDFs, it’s time to select the instrument to trade in. There are numerous convertible and non-convertible currencies you can trade in using these contracts.

However, selecting the right currency pair is a crucial step as it will have a significant impact on the trading outcome. A trader should choose a currency pair after in-depth research and analysis. In addition, knowledge of market conditions and factors of both the currencies in a pair is a must.

Select a Broker

NDF trading takes place over the counter, so you need a broker platform that connects you with live market conditions and provides you with a range of currencies.

Apart from these, the broker will provide you with facilities like leverage, analysis tools, trading software, insight, news, and many more things.

So basically, the quality of the broker will directly impact the quality of trade. Beirman Capitals provides you with exclusive services and stays available for 24/5.

Open an Account

fter selecting a good broker for trading NDFs, it’s time to move a step forward and open an account to start your trading journey.

There are different types of accounts you can choose from based on experience, services, and trading capital, like demo account, micro account, premium account, managed fund account, Islamic account, etc. So open an account with us and take advantage of our premium services.

Market Analysis & Strategy Making

Trading in NDFs or any other financial instruments occurs based on prediction. These predictions are made after analysis of sentimental, fundamental, and technical analysis factors.

After this, a trader needs to develop an effective trading plan for placing a trade based on their prediction. A good strategy involves all the crucial elements of trade that traders require at any stage of trading.

Start trading: Once you are done with strategy making, it is time for implementation. Place your first trade based on the strategy and analysis.
Placing a trade is a crucial step and needs to be done after implying proper order, risk, and leverage management to eliminate the chances of huge losses.

Why to trade NDFs

The increasing popularity of the financial market, especially the forex market, has given birth to different trade instruments. Here are some benefits that make NDF different from the others.

Wide range of currencies

One of the key advantages of trading NDFs is you can have the option to trade in a wide variety of currencies, especially in the currencies of emerging and developing nations.

NDFs are the best instrument to trade in non-convertible or partially convertible currencies. You can trade in currencies like Chinese Yuan, Brazilian Real, South Korean Won, Taiwan Dollars, etc.

Basically, with the major currencies, you can have access to the currencies of the countries where forex trading is subject to restrictions.

No ownership

NDF enables you to trade in currencies without actually owning the physical assets and take advantage of their price fluctuation

Flexibility and Customization

NDF offers traders the flexibility to trade anytime in any currency with any strategy. In addition, a trader can also customize the contract conditions like notional amount, fixing date, etc, according to their needs.

Hedging and risk management

NDF contracts can be used by traders for risk management and hedging purposes. Institutions and traders can use these instruments to deal with adverse currency price fluctuation movements.

Competitive Cost

NDF is amongst the most cost-effective ways to trade in currencies with competitive currency spreads and trading fees. Also, you can start trading in NDFs with little capital, which makes it a suitable choice for novice traders.

Liquidity

The NDF Market offers better liquidity to trade in currencies of emerging nations as compared to traditional currency markets.

Wrapping Up

NDF is amongst the best instruments for trading in currencies and hedging the risk of exchange rate fluctuation with many advantages like flexibility, customization, a wide range of options, cost-effectiveness, etc.

However, the above advantages came with the significant risk of losing money. A trader should embrace knowledge, skills, positive psychology, and emotional balance to manage risk efficiently for trading NDFs.