Forex CFDs

Many people have come to the world of trading by being tempted with an offer from a Forex broker. The Internet has opened up incredible opportunities for making money, and the high speed of communication means that it is practical to get all the information you want and trade happily ever after – at least that is the picture they paint.

Forex traders have a great deal of leverage in their trading, and certainly there are profits to be made if you can efficiently read the signs and make the trades in the right direction, which accounts for its popularity. In fact, less than 5% of all Forex trading is because someone wants to convert their money into a different currency, for business or commercial use, and all the rest is speculation.

With the availability of leverage, there comes risk, and it is possible to quickly lose as well as gain money. As Warren Buffett once said, “Risk is not knowing what you are doing”. The object as a trader is to know the risks and how to mitigate them to an acceptable level. In these ways, the regular trading on the Forex market is very similar to trading contracts for difference.

The foreign exchange market is already viewed as highly efficient in terms of the leverage available for trading. It has become very popular to trade the Forex over the Internet, and it offers generally much greater scope for profit than simple equity trading. It is impossible to say how large the Forex market is, as it is traded in many different markets, unlike stocks and shares. Estimates have put the size of the market at nearly $4 trillion a day.

The Forex market has a number of built-in advantages. It is very simple in concept, as you trade in currency pairs, which is the value of one currency compared to another. There are really only about four currency pairs that are widely traded, and these are in what are called the major currencies. Majors include the euro (EUR), the US dollar (USD), pound sterling (GBP), the Swiss franc (CHF), the Australian dollar (AUD), the Canadian dollar (CAD) and the Japanese yen (JPY).

The most popular pair to trade is the EUR/USD with about 28% of the total volume. The second is the USD/JPY at 17%, and GBP/USD and USD/CHF make up the four major pairings. In each case, the first currency is called the base, and the second the counter. The value traded is the number of the counter currency that is equivalent to one unit of the base.

The Forex market is ideal in terms of liquidity, with very little opportunity for major players to influence the values through their trading. As it is a 24-hour market, five days a week, you’re also less likely to suffer from gapping in values, as you do when a stock market opens for business.

However, Forex is traded in standard lot sizes which may be greater than you wish to use, so the Forex CFD has a place in the trading world to allow greater flexibility for people who are interested in making money out of foreign exchange.

Regular Forex trading is done on margin, which is the same principle used with contracts for difference. The broker will make his profits from the spread between the bid and ask prices at which the contracts are bought and sold. Generally, you’ll find that the spreads are tighter using FX CFDs than with margin FX trading.

When you trade a currency pair, and are long on the position, you are effectively long on the first currency and short on the second, which is you wish the first named currency to increase in value compared to the other. You can obviously obtain the reverse position by going short on the contract.

The use of FX CFDs is much easier still than regular Forex trading. There is never any doubt that you are trading purely for the difference in value which happens while you are in the trade, and the ability to choose the amount traded will help if you are not well capitalized, or you wish to take up several positions in the market.

Some traders watch the international news eagerly, hoping to profit from an apparent weakness or strength of a foreign country. This may indeed be the way that many people start to trade the Forex. However, it is not as easy as that, as the markets will make their value judgment and this may not correspond with the simple strength or weakness exhibited in the media.

Effectively, this is another demonstration that the markets to tend to price the news into their trading even before it is news, so the amateur trader needs to be careful before assuming that he knows which way the trend will go. The best advice is to start trading with a demo account until you get the feeling for the market. You should start gradually building up your experience until you develop the necessary confidence. You may choose to sign up for several accounts, and keep careful notes of the amount of spreads and how they vary during the day on the currencies in which you are interested. There are differences between brokers, and this is a way in which you can, with due diligence, make sure that you make the best choice of broker.

As these are leveraged products, including the regular Forex financial instruments, you will find that you multiply up your profits, but may also have the misfortune to multiply your losses. You should take care that you are clear on the amount that you can lose, and happy to accept that sometimes losses occur, despite the best that you or anyone else can do. Never place your account in jeopardy by trading in a way that puts too much at risk.