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CFD FX Trading - Profit With Caution
by: anniedqh on
Date: Fri, 8 Oct 2010 Time: 2:55 AM
Many investors are familiar with the terms FX trading and Contracts for Difference (CFD) trading. However, what does Forex CFD mean?
Simply put, Forex Contracts for Difference is an arrangement between two parties in which the seller agrees to pay the buyer the difference between the current price of a currency and the value of the currency at the time of the contract. FX trading, by way of CFDs, offers you an opportunity to make profits in the following two ways.
* When you buy a currency expecting it to appreciate.
* When you sell a currency expecting it to decline.
Forex CFD has the following advantages.
* You can trade with margin money
* High leverage options
* Hedging opportunities
The absolute value of the currency pair is of no concern to the trader. What is of concern to the trader is whether the price is above or below the contract price. Concisely, a trader has to make just one key decision, whether the investment is going to go up or down. The trader makes money if he is right, and loses if he is wrong.
So remember, if you throw caution to the winds, FX trading can make a big hole in your pocket. Bad money management and excessive use of leverage can negatively affect your bottom line. In addition, market manipulators may influence you to into selling pairs at a loss.
Globally, a contract for difference trading has become a rage since the last decade. Not just in stocks, but also in FX trading, investors are finding CFDs to be more flexible and cost efficient.
On the face of it, FX trading and CFD trading allow you to take advantage of the market or price movements without taking physical delivery of the security. Any difference in the price between the time you buy and sell is settled in cash. All this looks simple enough to a newbie. But you must keep in mind that the difference can be a significant loss if you are not careful enough.
A great deal is written on the benefits of CFD (Contracts for Difference) in comparison to other avenues of investment. The advantages, however, are accompanied by tradeoffs you must watch out for, if you really want to make a profitable buck. The fact is no one should trade in CFDs unless they have understood the intricacies well. This implies that CFD trading is suitable for only those investors who are experienced enough; possess the expertise, risk control and financial capability to trade in such instruments.
For a trader or an investor who has been traditionally investing into stocks, understanding the risks of CFDs and FX trading is very important. In particular, CFD Trading Markets can pose significantly more risks than what stock trading does. The greatest pitfall comes from trading on margins. A newbie, if not careful, can end up losing more money than the initial deposit. A beginner must keep in mind that margin trading has the potential of translating multiple small moves into either huge profits or losses.
About the Author
IG Markets Ltd is part of the IG group, which has several operating companies offering a variety of speculative products to a retail and professional base. For more information about FX trading visit www.igmarkets.co.nz
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