How FX CFD can make a difference to your portfolio
In financial derivatives trading, a contract for difference (CFD) does not involve owning any physical goods or securities. Instead, traders agree to exchange the difference between the open and closing trade prices upon settlement. These prices depend largely on specific factors like supply and demand. Trading FX, which involves pure currency trading, is also affected by supply and demand, as well as fundamental factors like geopolitical events.
Other than FX currency pairs, there are several underlying assets you can trade a CFD on, each with its own market characteristics. Some asset classes include commodities, stocks and indices. Once you know the principles of CFD trading, they can be applied to different markets.
Why trade FX CFD instead of FX
Currency pairs include the currencies that are part of the FX market, such as EUR/USD, EUR/GBP and USD/JPY. More exotic currencies can involve high volatility and fluctuating prices, offering attractive opportunities for CFD traders.
Due to high liquidity created by supply and demand, with many different currency pairs to trade on, FX is one of the most widely traded financial markets and there are several ways to access the markets. But with the rise of market volatility and online trading, gone are the days where traders call their remisier to place trades.
Traders can seek opportunities with leveraged products like CFDs. Similar to FX, FX CFD can be conveniently traded online and have a pricing mechanism where they are both charged on the spread. Unlike non-leverage FX products, an advantage of trading FX CFD is that you can trade on margin, meaning you only need to place a fraction of the transaction value upfront. However, with leverage products, you can magnify your returns and losses if the markets go against you. Another advantage is that you can short or long the market based on your speculation on the direction of a currency pair, earning returns based on the movement of the underlying asset and your position. This can be particularly attractive for traders, given recent market volatility.
“Surrounding the US election in particular had been strong expectations for a pick-up in volatility,” commented Jingyi Pan, Senior Market Strategist at IG. “This can be seen via the VIX futures curve where heightened volatility is expected into the year-end from October. Uncertainty here could induce further volatilities that may ripple across asset classes.”
FX CFD can also aid traders by hedging their current portfolio, so if you believe that the price of a FX pair will drop, you can offset potential losses by going short with a FX CFD. In addition, FX markets are open 24/5 and are highly liquid, allowing traders to conduct rapid transactions according to market movements. They are also convenient to execute and can be traded for $0 commission.
Risks and the importance of risk management
Because there is ample room for both reward and risk, it’s important to have a sound risk management strategy in place. That means understanding your own risk tolerance and deciding ahead of time how much you are willing to lose and what your profit target is over a specific time frame.
“As the good old saying from Benjamin Franklin goes, ‘If you fail to plan, you are planning to fail,’” explained Pan. “Having a trade plan including objectives, time horizon and risk management will all be essential to weather an increasingly uncertain market.”
Risk management tools are often integrated into the best trading platforms. One of these is IG, an industry leader with over 45 years of experience in the trading space, which is licensed to conduct investment and digital asset businesses by the Bermuda Monetary Authority. IG’s risk management tools can help clients mitigate losses during major market volatility.
IG also offers a range of cutting-edge charting tools, like ProRealTime and MetaTrader4, which can help you plan your trades better, including entering, placing your stop-loss and taking profit orders. Another feature like IG’s trade analytics tool can also help traders take stock of trading performance, review your past trades and identify trading mistakes so you can avoid them for your future trades by helping to track trading and analyse data. To get started with your trading journey, it is important to read up with IG Academy, including a wide array of educational courses and webinars to help you dive into the market.
To help hone your trading skills and give yourself more practice before trading the real markets, you can start with a demo trading account that lets you practise with $20,000 in virtual credits. Visit IG to find out more.
Disclaimer: This article was written in partnership with IG. All views expressed in the article are the independent opinion of Yahoo and do not in any way reflect the views, opinions or endorsements of Bermuda under No. 54814. (“IG”).
IG provides an execution-only service. The information in this article is for informational and educational purposes only and does not constitute (and should not be construed as containing) any form of financial or investment advice or an investment recommendation, or an offer of or solicitation to invest or transact in any financial instrument. Nor does the information take into account the investment objective, financial situation or particular need of any person. Where in doubt, you should seek advice from an independent financial adviser regarding the suitability of your investment, under a separate arrangement, as you deem fit.
No responsibility is accepted by IG for any loss or damage arising in any way (including due to negligence) from anyone acting or refraining from acting as a result of the information. All forms of investment carry risks. Trading in leveraged products such as CFDs carry risks and may not be suitable for everyone. Losses can exceed deposits.