If you are interested in trading on the currency markets, in recent years you have been given a choice of how to do this. You can open a Forex account at a broker, and there are many advertisements and websites encouraging you to do this. But you also have a choice of trading currencies using contracts for difference (CFDs), and there are some subtle differences that may influence which way you choose to go.
First, the similarities. Each type of trading allows you a great deal of leverage on your money. Leverage means that your investment can be less to control and profit from a certain amount of currency, or that you can increase the size of your trade for a given amount of money. Leverage is a double-edged sword, as it means that your losses can also mount up quickly, so when you are enjoying the advantage of leveraged products you must be careful to set limits to avoid the possible downside.
With both Forex CFDs and the normal Forex market there is an enormous amount of leverage available. Whether you get more leverage with CFDs or a Forex broker may depend on your relationship with them, but it may well be 100 to 1. Generally you won’t pay commissions, as the brokers profits come from the spread in price between the buying and selling figures.
The proud boast of the Forex market is that you can make money whether the currency is going up or down. This is true because you can either buy or sell the currency pair, and so take either side of the contract. This is no different when you use CFDs – one of the features of CFDs is that you can take a short position as easily as a long position, and this applies whichever market you’re trading in, whether stocks, commodities, or Forex.
This actually highlights one of the advantages of CFDs. You only need to have one account with a broker to be able to trade in many different markets, including the Forex market. You can choose to trade whatever financial security you think is currently offering the best chance of a profit, and you don’t need to open accounts at different brokers to have this facility.
One of the features offered by many CFD dealers is a guaranteed stop loss. This is something which is not available with conventional trading, and it depends on whether your dealer is a market maker or offers direct market access. If you can trade with a guaranteed stoploss, then this gives you an advantage over the normal stoploss, where the sell order becomes the market order when your stop level is reached. A guaranteed stoploss means that your trade will be liquidated at the price you request.
As you’ll find when you use CFDs, they offer more flexibility in the size of your position than other alternatives and are user friendly. Your contract is simply to gain or lose from the difference in value between the contract price and the market price.