What you need to know about Forex/CFDs before you begin
In terms of potential for profit, trading has always been a genuine opportunity to turn a small sum into a fortune. The advances in communications over the last two decades, bringing affordable, fast internet access to almost every corner of the planet, has revolutionised access to all markets, and brought the potential of trading within reach of almost anyone.
traded every day
In that environment, trading instruments that allow investors to leverage their funds, that is
control larger positions with their available capital, have grown in popularity.
Forex trading is the largest trading market in the world, with over $5.3 Trillion traded every day.
Forex is, of course, essentially a market of currency exchange rates, but that volume offers
tremendous potential, and in combination with the leveraged nature of Forex means that even
small investments can become significant sums if traded well.
Contracts for Difference
Contracts for Difference (CFD) share that ability to use leverage, allowing investors to control a larger price of the underlying asset,
whether that is indices that track stock values, or commodities such as metals and energy, allowing greater profit from a given investment
that direct trading of those assets could every bring.
In the case of both forex and CFDs, if you place a trade, you are not actually buying currency in forex, or stocks
if you trade a CFD on the Dow Jones or NYSE, rather you are speculating on the price movement itself.
As an example, if we look at forex, the USD/GBP pair is a popular trade, referring to the currency rates for US Dollar and British Pound conversion.
If you buy into a trade of the USD/GBP you are looking for the value of the Dollar to rise against the British Pound, but you are not actually buying either currency.
Your trade is on the price, not the asset itself. This is where the leveraged nature of Forex, and indeed CFDs, helps.
To simplify the process and give an example of leverage, Forex is traded in lots, which are $100,000 in value, although to reduce investment and risk, smaller lots,
known as micro lots, are common with some brokers. Leverage ratios vary depending on the trading platform, but they usually range from 50:1 to 200:1
and even 400:1.
What that means is, for every $1000 you trade, you control a position of a half lot, 2 lots or 4 lots. A 1 pip (the smallest measure of currency price change)
move in the right direction means $1000 profit per $100,000 lot. So, if you leverage your $1000 into a 2-lot position, although you only use $1000,
you gain all the profit from those lots, so a 1 pip move means $2000, and so on.
There is a downside to leverage though, in that if the trade goes against you, then the losses are similarly inflated. In our case, a 2-pip loss would be
Balancing this risk and reward is the skill of Forex, and indeed CFDs which work in the same way.
Forex and CFDs - Valuable Trading Benefits
Leverage is not the only way in which CFDs and Forex share advantages for traders, both operate
direct trading, meaning no central exchange, with the only cost to trade being the spread, with
no commissions or finance fees to pay.
These two factors are important, as they make trading both forex and CFDs low cost and easy to
access, which are both valuable benefits to anyone looking to invest for themselves.
The Skills to Success
Both forex and CFDs give investors the opportunity to trade directly for themselves, and through leverage quickly increase the value of their investment,
but to do that takes skill. The skill is not only predicting the market moves themselves, but of managing the risk and reward of leverage to maximize the profit and minimize risk.
Learning those skills is key to success.