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Contract of Difference (CFD) Trading


The foreign exchange (also called forex or fx) market is more than buying and selling currencies to make a profit. There is no such thing as typical fx trading. Different methods are used to create a profit, depending on personal preference of the trader. One method is Contract for Difference (CFD) trading. CFD is a method of trading the forex that allows the trader to not just profit from the end price of a given currency, but from the changes in the price of a currency.


Typical online CFD trading might go something like this: A trader enters into a contract to purchase euros in a standard lot of 10,000 at a value of $1.50 (USD) each. The trading period ends with the price at $1.55. The profit is $0.05 each, which totals $500 for the lot, minus the pip spread that the broker charges.


Although a trader may enter into a CFD intentionally, he or she doesn’t need to consciously trade CFDs. Technically, all forex transactions are CFD trades. The goal for all traders in all transactions is to buy low and sell high. A trader entering the market with a buy or sell order at the time of purchase is known as the price entry. The profit or loss happens when the trader exits the trade and pays the pip spread. Knowing what the marketis going to do next depends on the skill, knowledge and experience of the trader, as well as how the trader uses the information at his or her disposal.


Generally, CFDs are entered when there is a trend noted in the forex market. The forex trend is an extended view of the direction of the market. Instead of drastic highs and lows, there appears to be a slower, consistent movement in a particular direction. The forex rate can trend in one of three ways: It can go up (bullish), down (bearish), or sideways. A bullish (or long) market is a trend upwards (higher highs and higher lows). A bearish (or short) market is a trend downwards (lower highs and even lower lows).


This information may seem overwhelming to the beginner forex trader, but by taking small steps, the new forex trader will begin to understand that each piece of information fits into the puzzle of what makes a trader successful.

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