Retail FX trading represents a small segment within the overall foreign exchange market. In this form of trading, individuals do not physically buy or sell currencies. You don’t need to own yens to buy pounds, or Swiss francs to buy Russian rubles. Instead, it involves speculating on the direction of exchange rates between two currencies, facilitated through contracts for differences (CFDs).
If you expect the exchange rate of a currency pair to go up, you take a long position (buy the base currency and sell the variable currency). Conversely, if you anticipate a decrease in the rate, you enter a short position (sell the base currency and buy the variable currency).
What is a CFD?
A contract for difference (CFD) paper is a financial instrument that enables market participants to speculate on the price movements of an asset without owning the asset itself. CFDs are derivative instruments that allow traders to speculate on both rising and falling prices of underlying financial instruments and are commonly used to speculate in various markets. A CFD represents an agreement between two parties: the investor (who buys the contract) and the broker (who sells the contract). This agreement specifies that the seller will pay the buyer the difference between the current value of the underlying asset and its value at the contract’s closing time. This occurs when the trader decides to close the position. In cases where this difference is negative, the buyer pays the seller.
