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10 tips on how to trade CFDs on forex for beginners

 

If you’ve come here looking for guidance on trading forex CFDs, you’re in the right place!

Forex CFDs can be lucrative, but it’s very important you understand how risky they can be if you don’t educate yourself thoroughly before you start trading.

Here are our 10 tips on trading forex CFDs for beginners:

 

Forex CFD Trading Tip 1: Understand the forex market

The term forex is derived from the term ‘foreign exchange’. It’s where currencies are traded against each other.       
 

It’s by far the biggest trading market in the world, with trillions of dollars in currencies being bought and sold every day.       
 

The forex market is also known as the ‘market that never sleeps’, with major trading centres around the world keeping it open 24 hours a day, 5.5 days a week.

 

Forex CFD Trading Tip 2: Understand the key reasons for trading forex

Typically, there are 3 reasons you might trade forex:

  1. Tourism (you need foreign currency when you go on a trip there)
  2. Commerce (you run a business that sells abroad, and need to convert those takings into your local currency)
  3. Speculation (you plan to trade currencies directly and make a profit from changes in value between two different currencies)

When you trade forex CFDs, you’re speculating on the markets. (And you don’t actually own the currencies you’re trading, which we’ll cover in the next point.)

 

Forex CFD Trading Tip 3: Make sure you understand CFDs thoroughly

CFD stands for ‘contract for difference’.

A CFD is a financial agreement between you and a registered CFD broker. When you enter into one of these contracts, you agree to exchange the difference in value between an asset’s price when the contract opens and when it closes.

In forex, that ‘price’ is the value of one currency against another.

So, let’s say you want to trade the US Dollar against the Euro.

When you open the contract, you can get 1.2 US dollars per Euro.

Over the next four hours, the exchange rate changes to 1.3 dollars per Euro.

That shift of 0.1 is your profit or loss, depending on how you trade.

(For a more comprehensive explanation, this guide here should help.)

It’s important to know that when you trade CFDs, you don’t actually ‘own’ the currencies. You’re essentially making a ‘speculation’ on whether the price will go up or down.

(Though CFD profits may be taxable, depending on where you’re based.)

Start Trading Now

 

Forex CFD Trading Tip 4: Make sure you understand what ‘pairs’ mean in forex CFD trading

 

10 tips on how to trade CFDs on forex for beginners

 

All forex trades are done in ‘pairs’ of currencies. No matter which currencies you trade, you’re always trading one against the other.

For example, the currency pair EUR/USD is the combination of the Euro and the US Dollar. By trading this pair, a trader is effectively buying the Euro and selling the US Dollar.

Other example pairs are:

  1. EUR/USD (Euro/US Dollar)
  2. GBP/USD (British Pound/US Dollar)
  3. USD/JPY (US Dollar/Japanese Yen)

In all pairs, the first currency is known as the base currency, and the second is known as the quote currency.

In all forex trades, including forex CFDs, you trade the price of the base currency against the quote currency.

Choose your points of movement

Сalculate your hypothetical P/L (aggregated cost and charges) if you had opened a trade today.

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Past performance is not a reliable indicator of future results.

All positions on instruments denominated in a currency that is different from your account currency, will be subject to a conversion fee at the position exit as well.

 

Forex CFD Trading Tip 5: Understand the key risks of forex CFDs

There are 2 key risks that come when you trade forex CFDs:

  1. Forex markets can be very volatile. Due to the huge amount of money being traded, prices in forex markets can move quicker and faster than they might in other markets. This means it’s possible for you to lose (or make) more money, faster.
  2. Leverage means you can lose more than your initial capital. CFDs mostly involve leverage, meaning you can enter larger trades using less capital upfront. While this can be beneficial, leverage also means you can lose more than you initially invest. (We’ll explain this more thoroughly later on.)

 

Forex CFD Trading Tip 6: Get comfortable with losing money

This is a key psychological breakthrough that you need to make if you want to become a successful forex CFD trader.

You need to accept that you will suffer losing trades. Even the best, most profitable traders in the world lose money sometimes. And you will, too!

As Peter Lynch says, “There’s no shame in losing money on a stock. Everybody does it.”

Learning to cope with losses is something you need to do if you want to succeed in the long run.

One thing’s very clear, here: if you find the idea of losing money at all uncomfortable, do not trade.

That might sound harsh, but it’s the truth. If you can’t handle the idea of losing money sometimes, then trading simply isn’t for you.

 

Forex CFD Trading Tip 7: Understand the risks that come with leverage

 

10 tips on how to trade CFDs on forex for beginners

 

Leverage, as we just mentioned, gives you the ability to enter larger forex trades using less capital upfront.

So, let’s say you use leverage of 20:1.

You choose to place a trade on GBP/USD that’s worth £10,000.

Because you’re using leverage of 20:1, you’ll only need £500 in initial capital to place the trade. (Plus your margin. You can find more information on margins here.)

This can allow you to access bigger trades with less capital, as you can see. This is particularly useful if you’re a beginner with less money to start with.

VERY IMPORTANT. When you use leverage, your profits and losses are based on the total value of the trade, NOT on the capital you put in.

You can lose more than your initial stake.

So, if you make the trade we just mentioned, your profits or losses are calculated based on the £10,000 size of the trade, not on the £500 you put in.

This means that if you lose 20% on the trade, your loss would be £2,000, more than the money you put in.

 

Forex CFD Trading Tip 8: Understand how much capital you should be risking

A key part of becoming a successful trader is making sure you understand how much of your capital you should risk.

Now, this isn’t law. In the end, it’s your choice how much capital you risk. This’ll come down to your own personal risk tolerance.

However, the British Financial Conduct Authority recommends that you never have more than 10% of your total capital in high-risk trades (which forex CFDs are).

So, if you have £20,000 in capital, it’s recommended you don’t have more than £2,000 of that wrapped up in forex CFDs (or any other high-risk trades).

 

Forex CFD Trading Tip 9: Know that educating yourself is crucial to success

Becoming a successful trader can be a lifetime’s work.  

Take a look at any of the world’s most successful traders, and you’ll find that they put their results down to their study of the markets:

“The game taught me the game. And it didn’t spare me the rod while teaching.” - Jesse Livermore

“Risk comes from not knowing what you’re doing.” - Warren Buffett.

“Intellectual capital will always trump financial capital.”  - Paul Tudor Jones

If you want to be a successful forex CFD trader, then you need to educate yourself on the markets. You might as well accept this now.

 

Forex CFD Trading Tip 10: Practise trading before you do it for real

Before you place any forex CFD trades for real, it’s important you become 100% confident in the process.

You want to be completely sure you understand how to place a trade, how to set the size of your position, how to select whether you’re long or short, and how to set any stop losses or ‘take profits’.

At markets.com, we offer a full demo account complete with synthetic funds, so that you can practise placing CFD forex trades over and over again, without risking any real money.

Then, when you’re comfortable, you can start to trade for real.

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