- Min. Deposit
- Min. Investment
Forex and CFDs trading is the most popular way for ordinary people to access global markets. These instruments are traded on online platforms that have become more and more user friendly over the years, while the strict licensing rules have created a thriving industry with clear rules on traders’ protection. Many brokers offer CFDs and Forex trading and since Fair Binary Options is the best place to get nonbiased reviews of brokers, it was only natural for us to take up task of presenting these trading opportunities to our readers. To read more about how to trade Forex and CFDs, scroll down to our beginner guide!
While you will find many offers to trade forex online, many find it hard to grasp what is forex and how does one trade on forex. The term forex is short for foreign exchange. When we talk about forex, we mean exchange of foreign currencies. The term Forex stands for the global market for currencies.
This is the world’s biggest financial market where daily trading volumes reach up to 5 trillion USD. Online trading on forex makes just a part of the overall trading that takes place there. Imagine a car company, like Volkswagen, that needs to import car parts for its German production facilities, from Canada. In order to pay for the order, they need Canadian dollar (CAD), but they earn their money in EUR. Then they will use forex to exchange their EUR for CAD in order to pay their suppliers in Canada. Daily there are millions such transactions, big and small, that take place on forex market, opening various opportunities for traders to try to predict how currencies will move and try to earn some money from it. This is not always easy, and there are risks involved, as with any transaction in the financial market.
For everyone who wants to try trading online, they will eventually end up buying or selling forex contracts. There are many currency pairs that form exchange rates, some of them are listed below in the text. Based on the movement of the exchange rates, traders try to use technical and/or financial analysis to use those movements to successfully trade using trading platforms offered by various brokers. All this is possible from your home. All that is needed is an internet connection and a computer. Now-days, mobile phones and tablets are also capable of running trading applications so trading can be done on the go.
If you go online, you will find many guides about how to trade currencies on forex. Many of them focus on the financial analysis part, however, many beginners have issues understanding the basic concept that is behind the trading process, let alone complicated financial analysis. With forex trading, one earns money by correctly predicting the movements of the exchange rate in the future. Lets show with an example.
Imagine the exchange rate between EUR and USD – so the pair EURUSD is 1.1412 (that is 1.1412 USD per 1 EUR). In this case EUR is the base currency and USD is the quote currency. If you expect the base currency to strengthen (or technically appreciate in value) you will “go long” or buy the currency since you expect gains in its value. If you expect it to lose value, you will go short – or sell it for some other currency, in this case USD.
After you decide if you are buying or selling, as always the exchange rate will fluctuate and change based on various factors that influence the global markets. For this case, lets imagine you decided to go long and bought 100 EUR for 114.12 USD.
Lets also imagine there were positive news about the economy of the Euro Area and EUR gained in value. This means that the exchange rate increased – from 1.1412 to 1.1362. Notice, the change does not look that big – just 0.0050. However, you bought 100 EUR so, in USD, the value of your euros went up $0,0050 x 100 = 0.5 USD. This means that if you sold your EUR now, you would get more in USD than what you paid for it. You sell to lock in the gains.
Remember these 0,0050 that were earned as trading income in our example. Traders usually don’t speak in these absolute numbers since exchange rates movements are not that big on a daily or monthly basis most of the time. Each 1/10000 of the exchange rate, they call a pip. Meaning that what was earned in the previous example was 50 pips. This is the way traders count movements.
0.5 USD seems like a really low amount to win with 114.12 EUR invested, right? Seems easier just to wait for a year to get similar return by depositing the money in a bank. This is where leverage comes in. In forex, but in CFDs trading as well, as we will see below, traders can use the leverage to move more money in total, per trade. It works like a lever – you invest 100 of your own money, but by using leverage, the lever enables you to raise several times more money which you can use for trading.
If leverage is 1:10, it means that instead of buying just 100 EUR with your USD as in our example, you can actually get 1000 EUR, or 10 times more by investing 1141.2 USD to buy 10 times as much EUR, with only 114.12 USD of your own money. In this case you have not earned 0.5 USD after the exchange rate rose and you sold EUR back for USD, but you actually manage to gain 10 times more – 5 EUR. And these changes in exchange rate happen all the time, in both directions – with or against your prediction.
Leverage works other way too, you can lose more money than otherwise – in this case, if it was opposite, you would have lost 5 USD. If you lose too much, you get a popular margin call, meaning that your account has incurred so many losses that the broker won’t allow more trading unless you deposit more. The required margin is the amount of money you need to have on your account to execute the trade and cover potential losses. In our example, after you invest 100 you have to have money in your trading account left in case the price moves so much against your prediction that your loss exceeds your initial investment.
When you start trading, you will notice that for buy or sell orders the price is not the same. The highest price currency will be sold for is ASK – the asking price. The highest price someone is ready to pay or bid for currency or the asset – to buy it, is called BID. The spread is the difference between these two. Bid is always lower than the ask.
If you are buying EURUSD you will pay, for example, 1.0734 – the asking price (ask), but if you want to sell, so you can sell at 1.0730, the highest price everyone else is also bidding (bid). You notice that the fact that bid is lower than the ask means that if you did buy-sell operation instantly, you would be in small loss. In this case its 4 pips. The spread is wider when there is not much liquidity – meaning not many people are buying or selling and vice versa. The spread is the cost of brokerage services.
Spread can be variable which means that it is not the same at every point in time meaning that this cost will not remain stable through the time you are holding the open position/trade. Some brokers and platforms also offer fixed spreads which then guarantee traders they will always have the same spreads – meaning stable costs. Same rules apply to the CFD trading which we will cover below.
CFDs are acronym for Contracts for Difference. It’s a type of financial instrument that makes it possible for traders to win, or lose, on the difference between the strike price and the closing price of an asset. Strike price is the price that some asset had in the moment you bought a CFD. Let’s say you bought CFD based on price of Apple stock that cost 150 USD per share.
If you think the price will rise from that point, you are entering a “long” position by buying. If you believe it will fall, you will enter “short” position by selling. When you close the contract and your expectation was correct, you will get profit based on the difference between the price you bought at (strike price) and the price the contract was sold at (closing price). If you predicted wrong, the broker deducts the difference from your trading account.
With CFDs you can trade based on almost any assets that can be used as the underlying asset for the contract. It’s not just currencies, like with forex – you can enter trades based on price of gold, wheat and other commodities. Also, stocks, options, bonds and other instruments can be used as underlying asset for a CFD enabling traders to virtually enter every global market. The asset list that is offered mostly depends on the broker that offers CFDs and their platform, but nonetheless, the flexibility and simplicity of this kind of trading literally puts global market at the palm of everyone’s hand. Just launch the platform and start trading!
As explained, when you invest into “buy” or “sell” CFDs you are effectively speculating about future prices of an asset which underlies the contract. This means that you are saying “I believe the price of this asset (it may be stock, bond, gold or anything for that matter) will rise and I am going long by investing in a “buy” contract”. You are effectively entering a contract with broker where you are saying that the price will rise and they are saying it will fall. Who predicts correctly, gets the price difference between strike price and closing price.
You believe that the price of Apple stock will rise. You want to invest $100 into this prediction. Since just one Apple share is worth more than 150 USD, you cannot really buy the stock, not to mention other costs.
So, what you do? You speculate on price of the Apple stock by trading CFDs. You use the leverage 1:100 so instead of 1 CFD, you buy 100 of them. After a while it turns out you are correct and the price has increased $3 – that is the difference that belongs to you! Since you used the leverage, you have earned $200 ($3 per contract – your invested $100).
Maybe its best to explain what they have in common. All these financial trading methods and instruments are essentially vehicles that allow everyone to speculate on the future price of some asset or exchange rate. Main difference is the way trading is structured. With binary options, payouts are fixed. This means that traders immediately know how much they stand to win or lose.
Tricky part about binary options is that they have expiry time which makes them a bit tougher to predict, since its not just about the direction of the price of an asset, but also about the timeframe. With CFDs and Forex, losses and profits are variable, depending on the fact how much the asset price or exchange rate changed, but the trader can decide when to close the position, thereby limiting losses or locking in profits without the need to wait for expiry time. This lets traders have additional flexibility and adds to ways one can manage risks of the trading portfolio.
Broker is a company that offers trading services. In this case, broker allows traders to access the market by providing platform and liquidity. Traders need an account with a licensed broker in order to start trading and at the same time be sure the broker respects customer protection standards set by the regulator. All brokers that can be found online are not always licensed so its important to check before. Also, it is important to check what kind of license they have. Many brokers are global companies who have secured licenses from authorities across the globe to reach wider markets
Cyprus Securities and Exchange Commission – CYSEC Licence – passport to Europe
As part of the EU, and thereby the european single market in financial services, CySEC quickly became the most popular destination for brokers to seek license and use the EU passport system to offer their trading services in the single market. CySEC is probably the entity with most online trading companies in their register. From forex to binary options and CFDs, many of the brokers which decide to become regulated and thereby offer some basic standards in consumer protection choose Cyprus as their headquarters. Some of the popular brokers regulated by CySEC are 24option, Plus500, IronFX, IQoption, BDSwiss and others.
US traders will look for a CFTC (Commodities and Futures Trading Commission) licensed brokers, like Oanda, Forex.com, Interactive Brokers. Definitely the most popular exchange for currency trading is NADEX.
US customers can also use NFA licenced brokers. NFA (National Futures Association) is a self-regulatory organization, but its activities are overseen by CFTC. Non US brokers cannot accept US citizens as clients, however, if registered with NFA they can accept customers that live in the US but are not US citizens.
Forex and CFD traders from south Africa will look for FSB license in the footer of the broker’s website. Some Financial Services Board of South Africa (FSB) regulated brokers are Markets.com, CMtrading.
brokers: XTB (visit now)
brokers: OptionWeb, XM, Xtrade
brokers: Swissquote Bank
brokers: Forex.com, Oanda, CMC Markets
Other than regulation, there are other features that will differentiate forex and CFDs brokers of another. Most customers will be interested in the minimum deposit – meaning how much they need to deposit in order to start trading.
The amounts range from $10 to $250, depending on the broker. You can start with
If you deposit more, brokers will offer special types of accounts for premium customers. The services usually include personal account managers, premium support, larger leverage, advanced market analysis and more. Plus500 offers some of the best options when it comes to special features.
Platform is the software solution that traders use to trade. From the user side, it usually includes a big chart for analysis on one side and a list of available assets on the other side. In the list below one can usually find open positions, but also browse through orders, history, top assets and other features that were developed to make trading easier and more fun.
Forex and CFDs brokers offer several trading platforms.
The most popular are the MetaTrader4 and MetaTrader5 platforms. This is a software solution that requires a download on your computer. After a login with broker credentials (username and password), traders get all the familiar features of the platform and more. MetaTrader software includes various chart analysis tools and advanced indicators for assistance with the trading process. They also have the option to install various add-ons like automatic traders, additional analysis tools, strategy advisors and more. To find out how to trade using MetaTrader 5, read our guide!
Some brokers develop their own trading software that needs to be downloaded and installed, like MetaTrader in order to start trading.
Web Platform (Sirix, MetaTrader, jForex)
Web platforms are online software that works from your internet browser (Chrome, Safari, Internet Explorer, Edge and others). There is no need to download software. Traders just click a button on broker’s website and they enter the trading platform that enables instant trading of forex contracts and CFDs.
Meanwhile trading can be done also via mobile phones. Smartphone apps that are offered by brokers enable customers to trade from every place where they have mobile internet. This allows for a full control of the trading process so no opportunity is missed. One can also act on bad news from the markets and exit positions without having to go home to her computer.
Forex contracts and CFDs are derivative products. This means their value is derived from underlying asset. This means that traders do not need to enter complicated broker relationships, invest huge amounts of money and pay exorbitant fees in order to speculate on value of assets. You can use minimum money and enter the market through the derivatives.
Technically Forex are CFD contracts that are exclusively based on currencies. As previously explained, the profit and loss comes from the difference in buy and sell price of a currency – the exchange rate. Since there are many currencies across the world, and even more currency pairs that form exchange rates, forex trading offers many contracts on a daily basis, around the clock since currency market never sleeps.
Here are some of the most popular pairs
Others include basically any combination imaginable and available. Some pairs will naturally have wider spreads due to low volume of trading – low volatility. Some pairs move together, while some others move opposite – creating hedging opportunities. There are many ways to choose the trading currency. In our academy we have covered this topic already – learn what are majors and crosses and how to choose trading currency.
If you want to trade other kinds of assets – like gold, stocks, bonds etc, you will use CFD contracts. There are almost 10.000 CFD contracts offered daily on broker platforms, meaning there is more than enough trading opportunities out there. Assets that can be used as underlying to CFD contracts are
These are various metals and ores, but also materials such as sugar, wheat or cotton.
Some of the commodities that are popular include
Stocks are shares of companies listed on various exchanges. Since their prices fluctuate according to new information that becomes public from day to day, they are also used as a base for CFD contracts. Everyone will recognize the most popular companies like Apple, Microsoft, Coca Cola, Disney, Gazprom, Volkswagen, BMW and others. Now, with CFDs, if you are interested in performance of these companies and their stock prices, you have access to the market in order to speculate on their value, since there is no need to acquire the ownership of the stock.
Bonds are so called “I owe you” or IOUs. For the issuer it is debt, for the owner it is the right to a certain amount of interest and a full amount when the bond matures. Bonds are usually the way governments and companies to finance themselves. They prices move too, so they are also available to form basis for trading. In example, few years back, when Greece bonds were losing value, entering a CFD contract where trader would speculate on their falling price was a way to profit. Ofcourse, since the prices are volatile, the risk always remain.
Imagine putting many stocks into one basket. This is an index. Its shows performance across many stocks (or other assets too). If you want to see how German market is generally doing, you will take a look at DAX30 – the list of the 30 biggest stocks in Germany. With CFDs you can also speculate on the changes in the index value. Some of the most popular indices are:
After the broker has been selected, the platform loaded and the trader has decided which asset she wants to trade, there comes the hard part – deciding to buy or to sell. In order to figure this out, traders will have to get used to taking insights from the financial analysis.
in forex and CFD trading is very important. It uses past market data about movements, chart figures and volumes to derive a prediction for a future path of price. This analysis of historical trading patterns is used by regular traders and in the biggest financial institutions to make sense of the price charts. The trader recognizes certain types of chart patterns forming and acts according to them – deciding either to buy or to sell. Some of the most popular patterns are “head and shoulders”, wedges, triangles. You can learn all about these and other patterns in our academy section!
takes a look at the fundamental economical forces shaping the price movements. Lets say you have an announcement that Apple has earned more money than expected in the previous quarter. Since the market did not expect that, everyone will try to buy apple stock based on this information. The decision to buy AAPL was not derived from some chart, but it came from the important information about the company’s financial performance that beat the estimates. There are many indicators that can be used for fundamental analysis, like the liquidity ratios, GDP reports, inflation reports, profitability, operating margins etc.
Now that we have explained the most important aspects of using forex contracts and CFDs for online trading, we invite our visitors to to create a demo account, where they won’t be risking any of their money to try and see how trading forex and CFDs works.
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