In this article we will discuss practical examples of online trading in both Forex and CFD trading.
A brief introduction to online trading
The online trading market made its first appearance back in 1999, just after our CONSOB published the “Consolidated Financial Market Regulation Act”.
Any investor can use the internet connection to trade assets of any kind such as bonds, stocks, futures, government securities, commodities, Forex, CFDs and more.
The advantages of operating in this market are the total absence of commissions and the opportunity to be continuously informed about the various developments of the stock exchanges.
Traders have at their disposal various means to use and consult the various charts of market trends.
In this way they will be able to choose investments that are much more targeted and secure, increasing exponentially the possibility of receiving a profit.
However, always keep in mind that being a speculation, the relative level of risk is very high, you can make it a real job but you must be aware that you can earn a lot but also lose a lot.
Definition of Forex Trading
“Forex” stands for Foreign Exchange and is the buying or selling of one currency for another. It is the most traded market in the world because everyone, people, companies and countries participate in it.
In the Forex market, currencies are traded in pairs. When you trade US dollars for Euros, there are two currencies involved. For each foreign currency trade, you must exchange one currency for another.
This is why the forex market uses currency pairs, so you can see the cost of one currency against another. The EUR/USD price and quote, for example, lets you know how many US dollars (USD) it takes to buy one euro (EUR). The Forex market uses symbols to indicate currencies. The euro has the EUR symbol, the US dollar is the USD, Australian dollar = AUD, pound = GBP, Swiss franc = CHF, Canadian dollar = CAD, New Zealand dollar = NZD and Japanese yen = JPY.
Each forex pair, EUR/USD, for example, will be given a market price.
The price refers to how much of the second currency is used to buy a unit of the first currency. If the EUR / USD price is 1.3635, it costs 1.3635 USD to buy one euro.
Example and key Principle of Forex Trading
We use this article to illustrate an example of a forex market transaction.
We are going to use the most used currency pair, the Euro/Dollar (EUR/USD).
Let’s assume that you want to open a position upwards (called Long) using a margin of 1,000 euros and using a leverage effect of 1:100, in this case you will have at your disposal a capital of 100,000 euros which is equal to a standard contract EUR/USD.
The cross at that time has a price of 1.55, according to this we now see what can happen:
The price of the pair rises to 1.5550, in this case the upward difference will be 50 pips, as this currency cross has four decimal places the pip will be 0.0001 currency unit.
In this case the trader’s gain will be the result of the following trade 100,000 x 0.0050 = 500 Euro.
The price of the pair drops to 1.5430, in this case the downward difference will be 70 pips.
In this case the trader’s loss will be the result of the following transaction 100,000 x 0.0070 = 700 Euro.
Introduction to CFD Trading
The Trading CFD “Contract for Difference” is a financial product that gives people the opportunity to trade and invest in various financial assets (indices, individual shares, etc.) with a contract between broker and investor, instead of opening a position directly on a specific market.
The investor and the broker agree with each other to replicate market conditions and settle the difference between them when the contract closes. CFDs have many advantages that traditional trading does not have, such as being able to access foreign markets, leverage, or open a position if the asset price is falling.
CFDs allow you to invest very small amounts in major financial markets because you do not really own the asset you choose to trade. In recent years, CFDs have become very popular to invest in stocks, commodities, currency pairs, cryptocurrencies, stock indices and much more.