CFDs and spread bets are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Trading Forex CFD’s

What is forex?

Forex, or currency trading, foreign exchange or FX, as it is also known is the exchange of one currency for another. The forex market is the most widely traded market in the world with transaction worth over $5 trillion dollars happening each day.

Forex isn’t traded on a central exchange. It is an over-the-counter (OTC) product. This means that there is no physical location for the market, and it trades 24 hours a day. Given that currencies across the globe are always fluctuating, forex can offer many trading opportunities around the clock.

How does FX work?

In forex trading, currencies are always trade in pairs. FX is the value of one currency against another, for example the euro against the US dollar, EUR/USD.

The first currency is called the base. In the EUR/USD, the euro is the base. This is the one that you think will go up or down against the second currency.

The second currency is called the quote. In EUR/USD, US dollar is the quote.

If the price of the EUR/USD is $1.1150, this means that 1 euro is equivalent to $1.1150 dollars.

What moves the forex markets?

Forex traders often keep an eye on macro-economic data, interest rate policy and geopolitical events, which can all move exchange rates. An economic calendar can be used to identify in advance important macro releases such as employment data, inflation, GDP figures or when central banks will hold policy meetings. Geopolitical events can be harder to foresee and can result in rapid movements compared to other asset classes.

A popular way to trade forex is using CFD’s. When trading CFD’s you do not own the underlying market. You are speculating on the price movement of a currency pair.

How to trade forex CFD’s

Every currency pair is quoted with a sell and buy price. This is also known as the bid and the offer. For example, GBP/USD is quoted:

                                    Bid                               Offer

$1.2750                       $1.2752

 

If you think the price of a currency will increase versus the price of another then you buy at the buy price. This is also known as going long. For every point that they currency appreciates you make a profit. However, if the currency depreciates in value you will make a loss for every point that the position moves against you.

A point in forex trading is usually four decimal places. This is not the case for Japanese yen crosses, where a point is 2 decimal places.

For example, you buy 3 CFD’s of GBP/USD at $1.2752 and the price goes up. When the sell price reaches $1.2852 you sell to close. The trade has moved 100 points in your favour. The profit on your trade is calculated as:

Stake x points moved = profit or loss

3 x 100 = $300

The trade made you $300 profit.

However, if the trade moved against you, you would lose for each point is dropped. So, if you brought at $1.2752 and GBP/USD dropped to $1.2685, you decide to sell to close at this price. Your loss is calculated as:

Stake x points moved = profit or loss

3 x 67 = $201

You made a loss of $201.

In these examples any profit or loss is made in dollars. This is because the quote currency (the second currency) is in dollars. If you traded EUR / GBP the profit or loss would be in GBP. If you wee to trade USD/JPY any profit or loss would be in in Japanese Yen.

Making profits from falling prices

It is also possible to make a profit in a falling market when trading forex CFD’s. If you think the value of a currency will depreciate then you sell to open. This is also known as going short. For every point that the trade drops lower, you make a profit.

For example, you sell to open 4 CFD’s GBP/USD at the sell price of $1.2750. The price falls 100 points to 1.2650. You buy back at this price to close the trade. The profit is calculated as:

Stake x points moved = profit or loss

4 x 100 = $400

Should the trade move against you and the currency appreciates in value, you will make a loss for each point that it moves higher.

Trading with leverage

One of the reasons that CFD’s are popular to trade is because they are a leveraged product. They are traded using margin. Put simply, this means that you put forward a small deposit, which is called the margin, to open and control a position which has a larger value.

The most popular trade forex pairs mainly have a margin of 3.33% (otherwise its 5%). This means that you need to only put forward 3.33% of the value of the trade to open the position (not including trading costs). If the value of the trade (stake x market price) was $10,000, you would only need to put 3.33%, so $333 in this example, forward for the initial deposit.

 Compared to other assets this is a relatively low margin requirement. Shares have a margin requirement of 20%, or commodities which have a margin requirement of 10%.

It can be beneficial to trade on margin because it can free up money to use for other investments and / or to open other positions. While trading on margin magnifies your gains, it also magnifies your losses.

Magnified losses combined with sometimes fast moving and unpredictable markets can make trading forex CFD’s risky.

By implementing a solid risk management strategy, it is possible to have more control over trades. CFD forex traders often use stop loss order and limit orders to protect their trades.

Costs involved

As aforementioned, forex CFD’s are quoted with a buy and sell price. The difference between the buy and sell price is called the spread. This is the principal cost involved in trading forex CFD’s. Given that the FX market is liquid, this means that trades are quick to open and close and spreads tend to be tight.

If a position is held overnight, it could be liable to a small overnight financing charge. This is calculated as a small percentage of the value of the trade, divided by 365 and charged nightly.

CFD’s are free from stamp duty but are capital gains tax liable.*

* Tax laws depend on individual circumstances

Why trade forex CFD's with LCG

7,000+ instruments to trade
7,000+ instruments to trade
Low spreads from 0.2 pips
Low spreads from 0.2 pips
Fast order execution
Fast order execution
Deep liquidity from top-tier banks
Deep liquidity from top-tier banks