Forex CFD, Forex Contract For Difference

By: EconomyWatch   Date: 23 July 2009

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EconomyWatch

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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.

 

 


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