A Forex Contract for Difference or CFD is an agreement between two parties, in which the seller agrees to pay the buyer the difference between the current value of a currency and the value of the currency at the time of the contract. The seller profits from a decline in the value of the currency.
With forex CFDs, profits can be made in two ways:
-
Buying a currency when you expect it to appreciate.
-
Selling a currency when you expect it to decline in value.
Advantages of Forex CFDs
A forex CFD has the following advantages over conventional trading:
-
The price at which a forex CFD is bought becomes the base price. Thus, a CFD trader is not concerned with the least or the maximum value of the currency pair. Instead, he is impacted by whether the price of a currency is above or below the contract price.
-
One does not have to invest in full to buy the currency. The trader usually pays a margin of the real price. However, the profits are as much as in other forms of currency trading.
-
Leverage options are as high as 500:1. With this, the number of units a trader can invest in increases significantly.
-
Hedging opportunities: An investor can hope to make profits with a forex CFD even when a currency is declining.
Disadvantages of Forex CFDs
You need to be cautious of the following before opting for forex CFDs:
-
Market makers may influence you into selling your pairs at a loss.
-
Ineffective money management and the excessive use of leverage can severely impact the bottom-line.
-
Ease of access and low investment often lead to overtrading.
Forex CFDs are used in tandem with trading and mostly with the aim of evening out losses.
