There are lots of ways to profit from correctly predicting movements in foreign currency exchange rates. However, one of the most popular ways to enter the foreign exchange (or ‘forex’) market is through ‘contracts for difference’ (CFDs).
CFD forex brokers allow you to trade on a range of currencies.
You can also benefit by trading ‘on margin’ which reduces the need for a large amount of capital to begin trading.
However, while the potential for profit is significant, so is the potential for a substantial loss so you need to be fully aware of the risk to your money before you part with any funds.
How does CFD forex trading work?
A contract for difference is a contract between a buyer and a seller to pay the difference between the opening and closing value of an underlying asset (in this case foreign currency) when the contract is terminated.
CFDs work in a similar way to trade other types of currency exchange trading (for example, spread betting) via a forex traders account.
The prices of CFDs quoted by UK forex brokers are typically the same as the underlying exchange rates of the currencies and you can trade in any quantity.
However, unlike traditional currency trading where you pay the full amount of the transaction value, with CFDs you only make a small payment. This is called the ‘margin’ or ‘leveraging’.
It means you can achieve a much greater exposure to the currency market that you would normally be able to manage. Many UK forex brokers trade at margins of just 2%. You would, however, be liable for the full amount and more if the market moved against you.
As with other types of currency trading, you profit with CFDs by correctly predicting movements in exchange rates between a pair of currencies (such as the euro and US dollar).
What to look for in the best forex CFD trading accounts
With dozens of brokers competing for your CFD forex business, it’s important to undertake some research before you choose a broker and an account.
For example, you should establish what type of CFD forex market trading platform is offered. Having the facility to open or close a position anytime can be crucial so you should make sure your broker offers you lots of different ways of managing your account.
The best CFD forex trading platforms offer both online and mobile trading. This means you can manage your CFD trades on your laptop, PC, iPhone, Blackberry or other smartphone.
Check whether a broker requires you to download some software in order to trade online or on your phone and if so whether your phone is compatible with this.
You should also compare the ‘spreads’ offered by the leading brokers. This is the difference between the ‘buy’ and ‘sell’ price of the CFDs and effectively tells you what commission a broker aims to make on each transaction. Generally speaking, the best forex CFD trading accounts have a narrower spread.
Finally, you should check your chosen forex traders account has a ‘stop loss’ facility. This helps you ensure you minimise your losses if the market moves against you.
Apply for the account that gives you maximum flexibility to trade on the movements of a wide range of currencies, competitive spreads and convenient management and loss limiting tools.
