Trading CFDs in Forex Markets

Trading CFDs in Forex Markets

Forex traders that have experience spot trading are often looking for new ways to outperform the market and identify high probability opportunities.  What many conventional traders do not realize is the fact that there is a much broader range of possibilities when we are looking at the available assets in the financial markets.  One option that is often overlooked is the Contract for Difference (CFD), which is an excellent way of gaining exposure to specific assets in the forex space.

When applied to currencies, CFDs allow investors to take a bullish or bearish position in certain sections of the market.  So, for example, if you believe that the Euro is likely to rise in value during the rest of the market you could buy a EUR CFD to express that view.  If the value of the Euro rises in value during the time the position in held, the investor would than be able to capture the ‘difference’ as a profit.  

Forex Trading Strategies

Any time you are looking to take an active position when trading CFDs it is critical to formulate ways of assessing whether or not the value of a currency is likely to rise going forward.  There are many different ways of doing this but most of these strategies involve the use or fundamental analysis or technical chart analysis.  Both broad techniques have their advantages and the side you choose will depend on heavily on your individual investing goals.

If you have particularly strong skills in assessing the economic drivers that influence forex markets, it is often a better idea to use those skills in fundamental analysis.  Factors like rising inflation, improved GDP, and a strong labor market can all contribute to rising values in a currency.  If the opposite context is true, it would generally make more sense to take a bearish stance through a CFD trade.

Chart Analysis in CFDs

If you prefer to look at things in terms that are more mathematical, technical analysis might work better in your forex CFD trades.  Chart analysis required forex traders to look at the price history of a currency in order to determine where its value is likely to head next.  There are many market purists that argue against this form of analysis, suggesting that the past has absolutely no relation to what is likely to happen in the future.  But the rise of the use of computers in forex trading has made these types of approaches much more popular.  

Another advantage of this type of analysis is the fact that chart behavior is highly objective where other forms of analysis might be more subjective.  It can sometimes be difficult to let your emotions get in the way of your forex trading and technical analysis is often lauded as a means for removing those factors from the equation.  

In all, forex traders should understand that there is more than one way to make a profit in the financial markets.  CFDs offer a unique way of playing the space and forex traders should consider selecting brokers that give access to these assets in trading.

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About the Author
Richard Cox is a university teacher in international trade and finance. Lessons in macroeconomics and price behavior in equity markets. Trade ideas are generally suggestive of time horizons of one to six months.

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