Learning how to trade forex CFDs is a key point where we see many amateurs get stuck for years on end, and in reality, the vast majority of traders may never find themselves trading with forex CFDs without the right guidance.
This is not because this topic is overly complicated per se; the main issue we find is the lacklustre explanations that most “experts” seem to give. Well, we aim to remedy these all-too-common issues in this article, and by the end of it, we have no doubt you will come out with a better understanding of forex CFD trading. Let’s jump straight into it.
What Is Forex CFD Trading?
If you are reading this article, then you likely already have some idea of what CFDs are and how they are used. However, just in case, we think it is important to go over the basics.
CFDs means contract for differences – a fancy way of saying that you will earn the difference between the original price of an asset and its price after a set period of time. You (the investor) make a prediction of which way the price will go, with the asset either increasing or decreasing in value.
If you are correct in your speculation, you earn the difference between the starting price and the current price, and this works both ways – meaning you can net a profit even if the asset drops in value if that’s what you predicted.
This makes CFDs differ from usual investments in a variety of ways, and this is something we are going to talk about in the upcoming sections. However, we are still missing one key piece of the puzzle; forex.
Forex just means foreign exchange, which entails various currency and currency derivatives being traded. Forex is often synonymous with CFDs because almost all trades through forex are done with CFDs, but the two are not the same. You can’t trade forex without CFDs, but you can trade CFDs without forex.
Still with us? Great. Topics akin to this are somewhat difficult to talk about through mere text alone, and oftentimes it can make things CFD forex trading seem needlessly complex. But enough small talk; let’s finally get into it and talk about how forex CFD trading differs from other options.
The Advantages & Disadvantages That Come With Forex CFDs
There are a ton of unique pros and cons for forex CFD trading, and the experience whilst trading them when compared to the usual investments (eg. stocks) is vastly different.
For one, forex CFDs have a higher profit potential than most other investments, making them an exceptional option for those that know their way around the markets. Of course, this extra profitability also comes with a ton of additional risk, and this is exactly why this type of trading is usually only recommended for experienced investors.
This is because predicting the markets is no easy task, and when you factor in the staggering number of variables that can make a currency increase or decrease in value, it begins to become evident as to why this type of trading is not for the faint of heart.
In addition to this, forex CFDs are often much shorter-term investments than traditional stocks. The ability for currencies to rapidly rise and fall amidst any world events presents a prime opportunity for investors with a high tolerance for risk, and when used correctly, they can be incredibly lucrative.
How Forex CFD Trading Should Be Used
Whilst certain currencies do provide a level of stability that can be seen with more traditional investments, for the vast majority of forex CFD traders, this type of trading is primarily only used in somewhat niche situations.
For example, if a nation’s economy has just crashed for one reason or another, opportunistic investors may choose to trade forex CFDs in order to make it big when said economy bounces back.
Alternatively, it is not uncommon to see traders try and capitalise on a currency that they think is about to take a hit – either way can be incredibly profitable.
Forex CFDs are best used whenever there is a major shift in a well-performing currency, and whilst there are other uses for this type of trade, this is where they truly shine.
We hope we have been able to give you a much better insight as to how forex CFD trading differs from other assets. Getting involved with forex CFD can have a ton of benefits if you know what you are doing, and for experienced investors, they have the potential to be insanely profitable.
However, unless you are a gifted trader or have been at this trade for years, it may be a good idea to give CFD trading a pass for now. Trying to predict the markets is no easy task, and in reality, the chances of you losing cash are much higher than with most other types of investments.
Although, if you think you have what it takes and want to give CFD trading a shot, then you should go right ahead. You may just be in for an amazing time, and you may even hit yourself for not getting involved earlier. Good luck.