A CFD (short for Contract For Difference) allows you to speculate on possible price movements of financial assets such as stocks, Forex, or commodities without actually owning them. When someone takes a CFD position, the contract is entered between the investor and the CFD broker.
One of the best assets for CFD trading is currencies (foreign currencies, to be specific). Since Forex CFDs are some of the most popular instruments in the financial market, it’s a good idea to know how it works. Let’s take a look at some peculiarities of Forex CFDs.
The Foreign Exchange Market
For currencies trading, currencies are always priced in pairs. As a trader, you speculate on the exchange rate change of one currency against another currency.
Such a currency pair can be, for example, the EUR/USD: The Euro against the US Dollar. In the quotation, the first currency (here, EUR) is always the currency you speculate in front of (with a long position), and the second currency (here, USD) against which you bet.
If you buy a long position EUR/USD, you want the Euro to rise and the US Dollar to fall. Do you expect precisely the opposite? Then you should take a short position on the EUR/USD pair.
Below are several advantages of CFDs on currencies:
- Because currencies are not tied to any specific exchange; you can trade them 24 hours a day, five days a week.
- Forex prices depend on macroeconomic developments. So, you do not need knowledge of specific companies.
- There is a lot of information on the Internet about this topic.
How to Predict Forex Prices
To make money with Forex CFDs, it is necessary to understand how the currency market prices work. As in all other markets, the price (or exchange rate) of a currency pair is determined by supply and demand. In part, this is autonomous demand, i.e., the demand from governments and large multinationals for foreign currencies to pay for imports. The independent demand for currencies is relatively stable and is therefore not very interesting for the CFD trader.
A much larger part of the demand is speculative demand: the demand from investors who expect a currency to appreciate in value. When expectations for a currency are positive, demand increases, and with it, the price. Because not all investors get in simultaneously, you can be ahead of the market and profit from price rises (or drops).
There are roughly two ways to predict the direction of a currency price faster than the rest of the market: fundamental analysis and technical analysis. Fundamental analysis follows important macroeconomic news: for example, employment statistics, consumer confidence, and interest rates. If these figures turn out to be more favorable for a country than the market had expected, the exchange rate of that country’s currency will increase. If the figures turn out to be more negative, the price will fall. Such figures are published at fixed times so that you can prepare your CFD position in advance.
The other way to predict the price of a currency is technical analysis. In technical analysis, you don’t look at the economic factors but analyze a currency pair’s chart. Several patterns in the price chart indicate an upcoming rise or a fall.
Of course, you can also use technical and fundamental analysis side by side to make better trading decisions. Whichever method you use, CFDs on currencies are an attractive investment. If you are not yet trading these CFDs, we recommend that you take a closer look. Forex CFDs can be a great addition to your trading portfolio and offer a variety of winning opportunities.
Is Trading Forex CFDs Worth It?
The significant advantage of investing in CFDs is that you can apply leverage. There are, of course, risks involved. Because you invest in a relatively large amount of capital, you can lose a maximum of your investment in a short time. CFDs and Forex are useful for short-term trading, as both rising and falling stock prices can be speculated.
If you’re looking for something for the long term, CFDs aren’t necessarily the right options. But if you are looking for something for the short term and want to explore speculative opportunities with a wide range of assets, choose to invest in CFDs. Forex is especially popular among day traders due to its daily fluctuations.
