Almost all online brokers offer the nine core currencies as CFDs. These are the most widely traded assets on the international forex markets and have enormous liquidity. These assets include various pair combinations of the USD, GBP, EUR, CHF, CAD, AUD, NZD, JPY and CNY. Many brokers also allow CFD trading on currencies from other countries such as Russia, and the emerging markets. However, it is the ‘majors’ that account for around 95% of global forex trading.
Brokers also provide hundreds – sometimes thousands – of assets drawn from other classes including, stocks, commodities, indices, ETFs and bonds. Popular choices include high performance tech stocks like Microsoft and Google, energies like Oil and Gas, and precious metals such as Gold and Platinum, super volatile cryptos like Bitcoin and Ripple, US Treasury Bonds and some of the worlds largest funds. All these exciting assets are traded as CFDs and the same principles of speed, convenience and transparency apply.
Forex traders trade one country’s national currency for another’s at the current exchange rate. This gives us assets in the form of currency pairs e.g. EUR/GBP or USD/JPY. The value of these assets changes continually according to economic events and market demand. For convenience, major currency trades are conducted on ‘lots’. Each lot contains a specific amount of its currency. When you trade forex as CFDs, you don’t buy the currencies that you are trading. You simply open a position at the market price of your choice and aim to profit from the difference between the opening price and closing price. The same principles apply to other important assets like stocks, commodities, bonds, ETFs (exchange traded funds) cryptocurrencies and indices. Even highly focused forex traders will often expand their portfolios and aim to benefit from all market conditions and hedge their investments with assets of different risk levels.
A ‘carry trade’ is a strategy where traders use a high yielding currency to fund a trade with a low yielding currency. Pairs commonly used for carry trades are the AUDJPY and the NZDJPY as the interest rate spreads between these currencies are quite high.
National currencies – and other assets like stocks, commodities, indices, ETFs and bonds – follow the basic prinicples of supply and demand. The more that people want to own them, the more that they are worth. Most forex traders are in fact national governments and institutional investors who trade huge volumes of currencies – sometimes amounting to trillions of dollars a day. Small private investors are using CFDs to access these highly volatile and potentially profitable markets. When you trade currency pairs as CFDs, you can use leverage to buy lots, or fractions of lots. As each currency changes in value (either gaining or falling) its progress is measured in points known as ‘pips’.
Like most professions, traders have their own slang. Some common terms include:
Sterling, pound = GBP
Greenback, buck = USD
Swissie = CHF
Aussie = AUD
Kiwi = NZD
Loonie, the little dollar = CAD
Figure = any round number e.g. 10,000
Yard = A billion units of a currency
Any reliable broker will use a high tech trading platform that receives real time exchange rates directly from the markets. These are updated on a second by second basis, giving you the latest market prices on your screen. The same priciples apply to other assets like bonds, stocks, indices, commodities and ETFs.
No – you will never have to buy any currencies when you trade forex (or other assets like stocks, commodities, indices, bonds, ETFs) as CFDs. You are investing on the market performance of each asset. Your profits are calculated on the difference between your entry price and exit price. You will not legally own any of the currencies that you trade. Your potential losses are limited to each individual trade and there are no further liabilities, certificates of ownership or paperwork. This is equally true for other asset classes that are traded as CFDs – including stocks, bonds, indices, commodities and ETFs.
Forex trading is potentially highly profitable and there are few overheads. Some skilled and focused forex traders do make large profits. However, there are also risks involved. If you are impatient, greedy, impulsive or undisciplined, you will probably lose money. Any reliable broker will strongly encourage you to start your forex trading career in their education center. If a CFD broker tells you that you’ll become rich overnight, you should avoid them. Although forex is usually the most liquid and volatile market, the same rules apply to stocks, bonds, commodities, ETFs and indices.
That depends entirely on you! There are plently of people who begin trading part time with a basic account type and a small budget, and who go on to become successful full-time traders. If your goal is to become a full-time trader and make a good living from CFD trading, you will need to work at it. CFD trading is like anything else in life, it requires self- discipline, determination, and a willingness to learn from mistakes. You must also be ready to study the forex markets carefully (and the wider markets). You may also find that you prefer to create a diversified portfolio with a selection of stocks, commodities, ETFs, bonds and indices.
Leverage allows you to gain greater market exposure by trading with your broker’s money. If for example, you have x200 leverage on a forex trade, an investment of $100 will become a $20,000 dollar investment ($100 x 200). Leverage can potentially increase your profits, but can also increase your losses. It’s important to use your broker’s education center, or contact your account manager directly to learn more about leverage and the margin requirements that you need in order to use it.
Technical analysis is a discipline that studies the past performance of a particular asset, and follows it in real time, in an attempt to predict its future performance. Technical analysis uses a range of different charts to measure and illustrate how assets perform. Traders can look at the charts, sometimes going back years, to explore each asset and gain an understanding of the factors that can make it rise and fall in value. This can also tie in with fundamental analysis. It’s important to find a broker that provides top quality live charts that display real time changes to asset prices. You should also be able to easily research how assets performed in the past. As you develop as a trader, and adopt more sophisticated trading strategies, you’ll require different kinds of charts. Check whether your broker’s education center, or account managers can help you to find these charts and learn how to use them effectively.
All markets – whether they are forex, stocks, commodities, indices, bonds or ETFs, respond to political and economic events. Some of these may be scheduled events like a central bank’s interest rate decision or a presidential election. Other events might include a war breaking out or the discovery of new oil reserves. All these factors influence the mood of the markets and the value of individual assets. For example, the launch of a successful COVID-19 vaccine will improve trader sentiment and immediately increase the value of key indices like the Dow and FTSE. Strong GDP figures can boost the value of a national currency, or bad employment figures could lower it.
Effective traders follow both the financial news and the wider news closely. They need to quickly understand which scheduled economic events are relevant to their trading strategies and how they might influence the performance of assets. Traders also need to identify global or national news events that could affect the markets. This is the essence of fundamental analysis and wise traders develop a specialist knowledge focussed on their chosen assets, and a wider view that covers the general markets.
Good brokers provide traders with a range of tools to help with fundamental analysis. These can include, daily news reports, live feeds, webinars, video tutorials and eBooks. It’s also a good idea to devote part of each day to following news reports and maybe subscribing to high quality online newspapers like Reuters, WSJ, FT etc.
This is simply a form of analysis that focuses on the natural price movement of a market. Traders use the price bars on an indicator free chart to plan trading. You can learn more in your broker’s education center.
Too many new forex traders arrive at the trading platform without realistic goals or clear strategies. they don’t take the time to learn the basics. Your first goal as a forex trader is to understand how the global curreny markets perform. This means mastering the basics of analysis and risk management. You should then go to your demo account and practice with the platform tools until you can use them automatically. The next stage is to think about your financial expectations, how much time you can spend on the platform, and then create a personal trading schedule. These rules apply to all CFD trading, including bonds, ETFs, stocks, indices and commodities.