If you have been interested in trading for any time, you have probably got on the e-mail lists of some Forex brokers. Forex gives you great leverage of your money, controlling lots of 100,000 units of currency in the standard form, or some special smaller lots designed for individual traders, with little margin needed. But you can also trade in currency from your standard CFD account, which saves you having to open several accounts at different dealers.
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When you trade Forex using CFDs, the situation is quite clear – the base price is the price when you buy the CFD, which can be bought in convenient sizes. This is your reference price and your profit or loss has a direct connection to this starting point. Your leverage with a CFD can be as much as 500 to 1, depending on your dealer and account, giving you exceptional profit opportunities with the caution that a losing position can get you into trouble equally quickly. You may also find that the spread, that is the difference between the buying price and the selling price, is very low, and this is usually the only charge that you have when trading Forex CFDs.
As with conventional Forex trading, there is always a bull market – and a bear market for that matter – as you have a choice of which currency you think will increase against the other. There is no problem, as there can be with trading shares, in taking a 'short' position as one side of the currency pair is always short in your trade.
At IG Markets the full EUR/USD contracts for difference contract has a value $10 a point, which with the market at €1.25 is equivalent to an exposure of $125,000. Now, on a turbulent trading day this could easily move a couple of hundred points so providers sometimes offer a mini-contract that trades at $2 a point.
An example will make it clear. Suppose you are interested in trading the euro against the dollar, and think that the euro will fall in value against the US dollar. It's currently quoted at 1.2542/1.2543, meaning that a euro is worth about $1.25 – a euro would buy $1.2542, but you would have to pay $1.2543 for each euro that you bought. Given your position on the euro, you want to sell the contract, effectively shorting the euro, which you can do at a price of $1.2542. Taking a value of €10,000, which is called a mini contract in Forex jargon, the contract value would be $12,542, and your margin to trade this at say 1% is $125.42, which you should have deposited in your account.
Now there will be some small interest adjustments while you are holding the position, but the main changes in value will be due to the currency fluctuations. If the rate of exchange goes against you, you may get a margin call, which would require you to deposit more money or be involuntarily stopped out of the position. But assume that the trade goes the way you plan, to a quoted price of 1.2236/1.2237 for the sake of example. You would take an opposite trade to exit the position, buying euros at $1.2237. The contract value to close would be $12,237, giving you a difference of $305, less any minor interest payments.
On Monday May 10 2010 the British pound started the day relatively strong against the dollar, but the day would turn into one of the most turbulent days in British political history. Analysts concluded that, against the backdrop of political turmoil a couple of events had bolstered the pound.
The $975 billion support package as agreed by the European Union and the International Monetary Fund to guarantee that the problems in Greece would not spread throughout the euro zone had a positive affect on the pound. So too the Bank of England's decision to keep the key interest rate and the quantitative easing programme as they are. The latter would have calmed traders, reminding them that not all key monetary policy decisions in the UK are decided by the government.
At one point the rising pound was worth $1.502. However, when we reached the halfway point of the US trading day, the British PM Gordon Brown announced his willingness to step down as leader of the Labour party. Certain commentators argued that this was evidence that a pact between Labour and the Liberal Democrats was becoming a distinct possibility, and many not only fear that such a coalition would be short-lived but also that the tough measures that are required to cut the UK's budget deficit would not be carried out.
What most people agreed on was that the process of getting a working government in the UK was becoming increasingly protracted. Sterling would fall back to trade around $1.485 as currency traders voted with their fears. It will be interesting to watch what happens to sterling and the UK as the political landscape continues to shift around.
The biggest moves in the forex markets tend to occur after key data briefings such as the UK jobless rate, USA non-farm payroll numbers and interest-rate meetings for the central bank. Note also that the most liquid part of a trading session runs from 8am to 8pm (Monday to Friday, UK time), particularly in the first few hours of the London-New York exchanges overlap when most banks, insitutions and traders are active and market data is flowing from both Europe and the USA. This is naturally the easiest and cheapest time to trade.
