CFD on Forex Markets: How to Use

by Josh Biggs in Finance on 22nd March 2021

There are several ways for investors to trade forex. You can invest directly by trading on the spot market, where you buy the base currency itself at an agreed price in exchange for another currency. Besides, investors can trade derivatives on the foreign exchange markets. The list of these instruments includes both futures contracts or contracts for difference. Futures and CFDs share many functional similarities. However, with online CFDs trading, you have the added tax benefit of not being charged stamp duty.

Why Buy Currencies? 

Speaking of the market volatility, it should be said that not many markets can compete with international currency exchanges. Currencies allow you to speculate in interest rates and exchange rates in a centralized global marketplace. Traders can speculate in currencies on several key economic factors with floating currency exchanges. They favor one financial perspective over another, choosing to support one side of a currency transaction. The difference can be a significant factor for traders looking for an investment opportunity.

Foreign exchange markets are more sensitive to economic factors than stocks or commodities. Their supply and demand are dictated only in response to the returns that these currencies can bring and the likely shift in the value of the respective currency relative to the trader’s base currency. Thus, the forex markets represent perhaps more narrowly defined investment opportunities than some other markets — although this does not mean that the currency is somehow a more accessible investment base than others.

How to Trade CFD on Forex

CFD is a popular type of derivative due to which you can trade on margin. It gives you greater access to the forex market. Instead of buying a currency on the spot market, you purchase or sell units of a given financial instrument, depending on whether the underlying price rises or falls, in your opinion. There are many advantages to trading Forex CFDs. For example, you do not need to deposit the total value of the transaction. Before someone trades CFDs on currencies, they need to think about which factors affect the exchange rate.

There is a tendency for currency value to be inversely correlated with domestic inflation. Countries with higher levels of inflation tend to see their currencies depreciate compared to the currencies of their trading partners.

Higher interest rates provide lenders in the economy to obtain higher returns than in other countries. For this reason, higher interest rates attract foreign capital, which can cause an appreciation of the exchange rate.

Pay attention to the current account as well. The current account deficit suggests that the country spends more on foreign trade than it earns. This means that the government spends more foreign exchange than it receives from export sales and, therefore, offers more of its own currency than external demand. Excessive demand for foreign exchange drives down the country’s exchange rate. However, sometimes the current account deficit is simply a sign of a rapidly growing economy. 

Foreign investment is directed to stable countries with high economic performance and political stability, attracting foreign capital from other countries. Conversely, poor economic performance and political instability will lead to a depreciation of the exchange rate due to foreign investment loss.

CFD Benefits

By trading CFDs, you can:

  • Make a profit in any market trend: both with an increase and a fall in asset prices
  • Choose from a massive set of markets and trading tools
  • Trade on international stock and commodity markets with low start-up capital
  • Ensure your financial risks against future price changes
  • Receive dividends on shares
  • When trading CFDs for difference, brokers can set a dividend adjustment: the amount credited to the client’s account if the client has a buy position on the day they are entitled to dividend and debited if it is a sell position

Therefore, CFD trading offers many benefits. However, every action here requires careful thought and analysis.

Categories: Finance