The name “CFDs” is usually reduced to CFD. It is a form of trading that allows you to speculate on price movements of all types of assets, such as currency pairs, stocks, commodities or even cryptocurrencies. Instead of paying for the underlying asset, you will only trade on the underlying asset price movement.
In our article, we will talk about forex CFDs in more depth.
Forex CFD test
If you want to trade CFDs in Forex, you should understand the underlying trading market, where CFDs are simply an alternative way to trade forex pairs.
The forex currency pair consists of two currencies: the base currency and the quoted currency (the quote currency). A currency pair may be a reflection of the strength of one economy versus the other, and the exchange rate is a link to the relationship between these two economies. Therefore, you should seek to understand and take into account the various technical, political and economic events that affect each currency.
When you fully understand the fundamentals of a particular currency pair, you can then study how CFDs work.
Comparison of Forex and Forex CFDs
The basis for forex trading is to exchange a certain amount of one currency against another. For example, if you buy GBP/USD, you will win if the gbp rises against the US dollar (when gbp/USD moves upwards), or you will lose if the exchange rate falls (when GBP/USD moves downwards).
CFD trading allows you to use leverage on currency pairs, and to speculate only on the amount of price change for the main instrument. Instead of buying (or paying) a specified amount of the base currency, CFDs are paid in cash, based on the difference between the opening and closing price of a currency pair and not on the basis of the amount of trading.
Leverage is one of the main advantages of CFD trading, as you can increase the size of your position with relatively small capital. Keep in mind that when you use leverage to make more profits, you may incur heavy losses when you lose your position.
What is the difference between futures and CFDs?
Forex can be traded as futures or CFDs, but there are significant differences between these two financial derivatives, as one of the differences is that futures are often traded on exchanges, while cfds are traded outside the exchange (OTC). Futures – Commodity trading transactions such as: oil, natural gas, gold, etc., are an agreement to buy or sell a particular asset on a future date at a predetermined price. They are not forex CFDs that have no expiry date and can be closed at any time. It should also be noted that CFDs are short-term speculative products that the trader does not intend to keep for long periods. Profits or losses are determined by the difference between the opening price of the contract and the closing price. In CFD transactions, the brokerage firm acts as a counter-party, while in the futures market, the brokerage firm acts as an intermediary, between the trader and the counterparty.
Risk management in CFD trading
Like most derivative products, leveraged CFDs are risky compared to the actual trading of the underlying asset, due to the possibility of increasing the size of a position (which can lead to huge profits and heavy losses as well). Plus500 offers a set of risk management tools that help you control your trades, manage your risk effectively, and include “Close at Profit”, (close trades when you reach a certain level of profit), “Close at loss”, (to reduce risk at a certain value) and “.” “Guaranteed Stop”, and “Moving Stop”?
As with any trade, you should always keep in mind the golden rule: you should never trade more than you can afford to lose!