The Forex market, renowned for its liquidity and potential profitability, can act as a magnet for many traders and investors.
Amidst the myriad ways to engage with the dynamic Forex market, one worth exploring is Plus500’s Forex CFDs.
Accordingly, this article and video delve into the ins and outs of Forex CFD trading and offer insights into what traders and investors should expect before venturing into the complex yet rewarding realm of Forex markets.
Main Forex Pair Classifications
The Forex market is multifaceted and features a myriad of currencies and currency pairs. These can be segmented into Major, Minor, and Exotic. Major pairs are some of the most traded pairs in the world like the EUR/USD and the GBP/USD while minors are those who aren’t pegged with the US dollar like the EUR/GBP, and Exotics refer to pairs from emerging countries like the USD/NOK.
You can read more about the different types of Forex pairs in our article on the “Most Popular Forex Pairs.”
Defining the Forex Markets
Forex, FX, or Foreign Exchange is the market whereby national currencies are exchanged with one another. This, for example, includes Forex pairs like the Euro and the US dollar (EUR/USD) and the US dollar and the Japanese yen (USD/JPY) among others.
Who Participates in the Forex Market
Some of the major Forex market participants include the following:
Central Banks, Investment Banks, and Commercial Banks
Central Banks like the US Federal Reserve or the Eurozone’s European Central Bank (ECB), are bodies responsible for deciding on a nation’s monetary policy. These institutions are arguably among the most important ones in the Forex market as they decide on interest rates that directly affect Forex exchange rates.
Furthermore, central banks can strengthen or weaken their currencies in order to control inflation. To illustrate, during extended deflationary periods, a Central Bank might devalue its currency by increasing its supply, and then, the additional currency can be used to buy a foreign currency, hence leading to the national currency depreciating.
To understand how Central Banks function better and how they affect monetary policy you can read our article on “Central Banks of the World Explained.”
As for investment and commercial banks, these play a significant role, constituting a substantial portion of the overall trading activity. Such banks enable their customers to engage in Forex transactions and trades through their platforms, serving as dealers for clients.
Corporations
Multinational corporations and businesses engage in Forex trading through payments for the exportation or importation of goods and services; this is done to mitigate the risks linked to fluctuations in foreign currency values.
Retail Traders and Investors
This is perhaps the most obvious type of Forex trader and it refers to individuals who use trading platforms or Forex brokers to conduct trades. Such traders and investors can use technical analysis among other market analyses to aid their trading strategies.
There are different types of trading strategies and the main ones are features in our Trader’s Guide video on “Popular Trading Strategies.”
Moreover, besides the above-mentioned institutions and bodies, portfolio managers and hedge funds also engage in Forex trading.
Ways to Trade Forex
As previously mentioned, there are a variety of ways to trade Forex, among the main ones are Over-the-Counter (OTC), through a Forex Exchange, or a Forex trading platform.
Over-the-counter (OTC)
Forex OTC (Over-the-Counter) trading refers to trades that are not made on a formal exchange. This can be done through messages, emails, telephone negotiations, or ever through face-to-face transactions.
Forex Exchange
Forex can be traded on exchanges that are not only physical but also electronic like the NASDAQ and Eurex.
Forex Platform
In addition, trading Forex can be conducted through trading platforms such as the Plus500 platform which is available on desktop and mobile devices and provides CFD trading services on Forex and other markets like Commodities, Stocks, Indices, and more.
What Are Forex CFDs?
Forex Contracts for Difference (CFDs) are derivative contracts that can be traded in order to potentially benefit from both rising or falling Forex price changes (based on the trader’s position and speculation).
When trading Forex CFDs, the traders are essentially speculating whether they believe the Forex pair’s price will rise or fall. As such, if a trader believes that the Forex pair’s price will fall then he can open a sell position and if the trader believes that it will rise then he can open a buy position.
To get a more in-depth understanding of how CFDs work and what CFDs are, you can watch our free Trader’s Guide video on “What Is CFD Trading.”
Pros and Cons of Forex Trading
Before choosing to trade Forex, it is important to look into the potential advantages and drawbacks of this type of trading. Here are the main ones:
Potential Advantages of Forex Trading
- Liquidity: Forex markets are known for being highly liquid which means that there is a reduced likelihood of market manipulation or irregular price fluctuations.
- Availability: Unlike other financial markets, the Forex market is open 24 hours a day 6 days a week, which makes it an available market for many who seek trading during more flexible hours.
- Affordability: Forex rates are low and affordable which makes it suitable for traders seeking access to the financial markets at a lower cost.
Potential Disadvantages of Forex Trading
- Low Regulations: Forex is less regulated than other markets, which means that it is accompanied by lower transparency.
- Volatility: Forex is certainly liquid but it is also quite volatile as a variety of factors ranging from interest rates to recession and monetary policy or fiscal policy changes as well as political and geopolitical tensions can affect currency prices and Forex exchange rates.
Some of the Ups and Downs of Forex CFDs
In addition to examining the overall pros and cons of the Forex market, it is crucial to delve into the specific advantages and disadvantages associated with Forex Contracts for Difference (CFDs).
Understanding the unique aspects of Forex CFDs provides a more comprehensive perspective on the risks and benefits inherent in this financial instrument.
The Upsides of Forex CFDs
- Lower Costs: Trading CFDs come with lower trade size than traditional contracts which means traders can access a wider range of markets (including Forex) using less capital.
- Flexibility: CFDs offer traders the ability to potentially benefit from both rising and falling Forex prices whereas other contracts don’t. Moreover, CFDs offer flexibility to those seeking to trade financial instruments without having actual ownership of the underlying asset.
The Downsides of Forex CFDs
- Higher Risk: Since CFDs are leveraged, they can potentially magnify gains while also potentially magnifying losses when adverse price fluctuations materialize.
- Lack of Ownership: Those interested in trading CFDs on Forex or other instruments must keep in mind that they won’t own the underlying asset but are rather trading their price movements.
How to Trade Forex CFDs with Plus500
In case you feel that Forex CFDs are the suitable choice for you and for your trading goals and needs, then you can trade them with Plus500.
Plus500 is a global multi-asset fintech firm specializing in CFD trading on Forex, Stocks, Commodities, Indices, and more. The company’s trading services are available across a wide range of devices. You can learn more about Plus500 in the “About Us” section.
To trade Forex CFDs with Plus500, you can follow the following steps:
- Sign Up/ Sign In to your Plus500 trading account.
- On the Plus500 app, you can either type the name of your preferred Forex pair in the search bar, or you can click at the top of the page and choose the Forex category.
- Plus500 offers over 60 different Forex pairs. After scrolling through, you can click on the Forex pair of your choice.
- Afterward, you can choose to open a buy position, in case you believe the Forex pair’s price will rise. Alternatively, in case you believe that it will fall, you can open a sell position.
In addition, you can set up free Forex trading alerts to keep you posted on any notable price swings that can affect your portfolio.
Benefits of Trading with Plus500
Plus500 may suit traders who seek leveraged trading, a user-friendly platform, easy withdrawals, and free and unlimited demo account mode to practice trading in real-market conditions without committing real capital. Most importantly, Plus500, a publicly traded company, operates through regulated companies that undergo regular regulatory changes to ensure maximum protection of its clients’ capital.
You can check out other benefits of trading with Plus500 here.
Other Helpful Resources for Forex Traders
For individuals interested in trading Forex CFDs, here's a curated list of valuable resources to explore before embarking on the trading journey:
All of these helpful resources can be found on Plus500’s website for free.
Conclusion
The Forex market, with its diverse currency pairs and market participants, offers a potentially lucrative yet complex landscape for traders. One way to trade Forex is through Plus500’s CFDs which offer leveraged trading and the ability to trade on both rising and falling Forex pair prices without owning the Forex pairs as underlying assets.
