What is FX CFD? October 30, 2019
FX or forex, is commonly referred to as the foreign exchange market. In layman’s term, FX trading is the exchange of one currency for another at a predetermined exchange rate.
Forex CFD (FX CFD) is a form of Contract for Differences (CFD) that allows you to participate in the price movements of the underlying forex pair. The main objective of FX CFD is to exchange one currency for another in the expectation that the prices will appreciate / depreciate depending on the position taken.
FX is also the most actively traded market in the world.1 According to the Monetary Authority of Singapore in 2019, the daily average Forex turnover in Singapore reached a new high of US$633 Billion in April 2019!2
How to read a Currency Pair?
Fig 1
FX CFD is always traded in currency pairs. Let us use a commonly traded currency pair the USD/SGD CFD to illustrate an example of currency pairs.
USD, the first currency appearing in the currency pair is known as the base currency. The base currency is the currency against which exchange rates are generally quoted. SGD, the second currency appearing in the pair is known as the term currency.
If USD/SGD = 1.37000, it means that every 1 US Dollar is worth 1.37 SGD. Based on this quotation, Profit and Loss will be reflected in the term currency.
Fig 2
Another key term to understand is Pip. Pip is a standardised unit used in forex to track price movement. 0.1 pip is the smallest amount by which the price may fluctuate. A currency pair such as USD/SGD has 5 decimal places for which a pip refers to a 0.0001 movement. For currency pair of USD/JPY that has 3 decimal places, a pip refers to a 0.01 movement. For example, 1 pip on a 100k contract is about 10 USD, while 1 pip on a 10k contract is about 1 USD.
To make forex trading more manageable, you can trade FX CFD from a minimum contract size of 10k with CFD on POEMS.
Fig 3
Lastly, spread in trading terminology refers to the difference in the bid and ask price of the currency pair. A tighter spread means a lower difference between the bids and ask prices. In the case for Fig 3, the spread for the USD/SGD CFD currency pair is 1.5 pips.
Going Long and Short in FX CFD
One of the key reasons for the popularity of CFD trading is that it allows you to go long and short. That essentially means that one is able to participate in both bullish and bearish markets. There is no restriction by market direction and you can profit both ways.
GOING LONG IN CFD:
Long = Buying base currency and selling term currency.
In this example, we will use the currency pair USD/SGD CFD. If you expect the USD (Base Currency) to rise against the SGD (Term Currency), you would go Long on USD/SGD CFD by buying the pair at 1.38 and selling the pair in the future when the exchange rate increases.
Working Example
George goes long on 1 FX CFD on USD/SGD @ 1.38000.
USD/SGD rises.
He subsequently closes his FX CFD position on USD/SGD @ 1.53000.
He earns a profit of:
(1.53000 – 1.38000) x 10,000 = 0.15000 X 10,000 = SGD1, 500.
However, if USD/SGD falls below 1.38000, he will make a loss.
GOING SHORT IN CFD:
Shorting = Selling base currency and buying term currency.
Conversely, using the same counter USD/SGD CFD, you go short by selling the USD (Base Currency) and buying the SGD (Term Currency). If you expect the USD to fall against SGD, you would sell the pair at 1.38000, and subsequently buying the pair when the rate drops below 1.38000.
Working Example
George goes short on 1 FX CFD on USD/SGD @ 1.38000.
USD/SGD falls.
He subsequently closes his FX CFD position on USD/SGD @ 1.23000.
He earns a profit of:
(1.38000 – 1.23000) x 10,000 = 0.15000 X 10,000 = SGD1, 500.
However, should USD/SGD rise above 1.38000, he will make a loss.
Ready to trade FX CFD? Get more information on FX CFD at www.phillipcfd.com/launch-of-fx-cfd/.
References:
- [1] https://www.mas.gov.sg/news/media-releases/2019/singapore-bis-fx-survey-2019-results
- [2] https://www.nasdaq.com/articles/forex-market-overview-2019-06-07
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Contracts for Differences (CFD) Team
Phillip CFD offers more than 5000 CFD contracts and provides the largest number of Singapore CFDs available for shorting with round-the-clock trade support. Visit our CFD website to find out more.
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