Currencies

Foreign Exchange Market

CFD trading allows you to place leveraged trades on currency pairs, speculating on the movement of one currency against another. When a currency’s value changes, it changes relative to another currency. If the EUR/USD quotation goes from 1.13 today to 1.14 tomorrow, it means that the Euro has appreciated relative to the U.S. dollar.

In CFD trading, a forex quote will accordingly consist of two currencies: the base currency and the quote currency. A currency pair will therefore tend to reflect the strength of one economy versus another, and the exchange rate is a function of the relationship of these two economies. When trading forex pairs, you should therefore always try to understand and consider the various technical, political, and economic events that affect on each currency.

Popular pairs

The definition of ‘major currency pairs will differ among traders, but most will include the four most popular pairs to trade namely the EUR/USD, the USD/JPY, the GBP/USD and the USD/CHF. As the Euro and the US Dollar represent two of the largest economies in the world (the US Economy and the European Union), the EUR/USD is undisputedly the world’s most traded currency pair.

Commodity pairs like the Aussie (AUD/USD), the loonie (CAD/USD) and the Kiwi (NZD/USD) are also considered major forex pairs that tend to be greatly influenced by commodity prices. We also have, cross currency pairs that do not include the US Dollar but are considered “major pairs” including the EUR/GBP, the EUR/JPY and the EUR/CHF.

Why trade Foreign Exchange?

Forex trading allows you to easily gain exposure to markets around the world. While most trading is done in the world’s major currencies, you also have access to emerging markets through more “exotic” pairs.

While you can go long and short on all other CFDs, short selling is an inherent part of trading forex. This is because you are always selling one currency (the quote currency) to buy another (the base currency). Forex trading also benefits from a larger trading window as the market is open 24 hours a day, five days a week – which means that forex can be traded from 9pm Sunday to 10pm Friday (GMT).

Trading example

Let us suppose that you wish to place a trade on the EUR/USD which has a sell price of 1.15540, and a buy price of 1.15560. You think the Euro will appreciate against the U.S. dollar, so you decide to go long or place a “buy” trade of 1 lot.

Each lot is equal to 100,000 of the base currency of the pair. In this case, buying a single EUR/USD standard lot is equivalent to buying 100,000 units so your total position will be worth $115,560.

CFDs are leveraged products, so you don’t have to put down the full value of your position upfront. A deal of this size on EUR/USD, using leverage of 1:30 would only require that you have free margin of 115,560/30 = $3,852 to place your trade.

Benefits

The forex market is traded worldwide, so trading is pretty much continuous as long as there’s a market open somewhere in the world. From the Monday morning opening in Australia to the Friday afternoon close in New York, the forex market never sleeps.

The forex market is also incredibly liquid, but it can’t be easily manipulated by any single entity. There are so many participants involved in the foreign exchange market, that no single entity can fully control the market price for an extended period of time.

Lastly, when trading Forex with CFDs you can use leverage, which enables you to increase the size of your position.

Risks

As with all CFD products, forex trading is leveraged, which means that gains or losses are magnified by that same leverage ratio. As currency markets can be volatile—even small price fluctuations can trigger margin calls when trading with high leverage.