It can be hectic for a complete novice to get started with forex CFD. For instance, you may not understand what makes forex CFD unique. You may also want to know why some traders discourage you from venturing into forex CFDs and why it suits day traders.
If you seek answers to the above frequent worries, you are in the right place. Here, you will get the most straightforward explanation of forex CFD definition, upsides and downsides, and a recommended way to start enjoying its benefits. What is more? Read on to find out.
Understand the Uniqueness of Forex CFDs
Simply put, forex CFD trading entails speculating on a currency pair. You can either go long or short on a currency pair. Here is more explanation of the technical terms.
A standard forex trading environment involves owning (through buying) or selling currency pairs. Currency pairs often come in two parts. For instance, EURUSD or EUR/USD means trading Euros relative to the US Dollar.
The first part of the reading is the base currency, while the second section is the quote currency. You buy or sell the base currency in a spot forex market. For example, a EURUSD reading of 1.1200 means you spend or earn 1.1200 USD for every unit of EUR you buy or sell.
The lowest price at which the broker is willing to transfer the ownership is the ask price. On the other hand, the bid price is the maximum price you are willing to pay for the currency pair. After the agreement, you wait for two days for the money to be transferred.
In a forex CFD market, you forecast if the prevailing currency pair price will fall or continue rising. Assume you predict that 1.1200 EURUSD prices will rise. Say you want to own a lot costing $100 000. Instead of paying $100 000 for the pair, the broker lets you trade on leverage.
That is, you deposit $1000 to speculate on $100 000. The leverage used is (100000 / 1000) 1:100, meaning the broker contributes $100 per $1 you contribute.
Later, the price rises to 1.1210. Then, you earn $100. That is (1.1210 -1.1200) * 100000. Likewise, you will lose $100 if you go short (predict fall, while the price rises).
Unlike the spot forex market, most governments do not regulate forex CFD. As a result, the lot size can vary. That has upsides and downsides, as explained below.
Upsides of Forex CFD Trading
Forex CFD lets you earn in both a rising or falling market. For example, you can predict the market prices to drop. And earn if the current prices drop. Likewise, you could forecast an uprise, earning if your speculation becomes true.
You can trade a lot with less amount than the standard price. For instance, you can earn a decent amount of over $100 000 by investing $1000. Efficient capital use can enable you to diversify your trading portfolio.
You incur lower costs to trade forex CFDs. For example, you pay less for transaction costs, spreads, and deposits. Most importantly, you incur lower charges to withdraw your earnings. Lastly, forex CFD trading presents you with trading flexibility. Although forex CFD trading is best for day trading, you can trade 24/7.
Downsides of Forex CFDs
The most familiar drawback of trading in forex CFDs is that wrong speculation could lead to huge losses. Also, the swap fees could be unmanageably high. They result from trading beyond day trading.
You could be wondering some traders lose money from forex CFD trading when the process seems straightforward. Most novice traders lose trades due to inadequate market research. That is why you should build your analysis and risk management skills to win most of your trades.
You can get started with a demo account. Most brokers present you with a demo account. Here, you can explore the forex CFD market while sharpening your trading skills.
The first step to earning the lucrative forex CFD income is understanding the notable traits of the market. After familiarizing yourself with the upsides and drawbacks of forex CFD trading through a demo account, you can open a real account.