If charts and news is your thing, then you are probably someone who will find trading exciting. Forex trading, as the term suggests, is the buying and selling of currencies. In everyday lingo, this is often used to refer to a specific type of Forex trading that is classified as “CFDs”.
In this article, we will take a detailed look into what CFD trading is, how Forex is traded on a CFD broker, and the various business opportunities that lie in this segment.
Let’s get started.
What is CFD trading
You must already be familiar with trading stocks of companies like Apple, Microsoft, or Google. Let’s say Apple is currently trading at $350, and you invest $350 to buy exactly 1 stock. You are now legally a shareholder and own 1 stock of the company.
In a few weeks, assume the stock went up by 5%.
Your profit through this trading activity would be just about $17. Impressive, but not good enough.
CFD, or Contracts for Difference, is a form of derivative trading where you speculate on the price movement of various assets like stocks, forex currency pairs, stock indices, commodities, etc.
When you invest $350 to buy a CFD contract of Apple, it is very much like buying a stock of Apple. But the big difference here is that you are not a shareholder. Instead, you are merely speculating on the price movement without owning this asset.
Since you do not own assets with CFD contracts, this allows for leveraged buying.
Leverage, in this context, refers to borrowing money to execute a trade.
Let’s say a broker offers 100:1 leverage. That means this broker can fund you 100 times your investment. That is, if you invest $350 at 100:1 leverage, your trade is actually worth $35,000 ($350×100).
This way, the same 5% movement in the value of the stock nets you a profit of $1700 (and not just $17 like earlier).
But here is the big caveat: the stock could technically go in either direction. If the stock of Apple went down by 5%, you would technically lose $1700 – this is even if you had only put in $350 to buy the contract.
This is what makes CFD contracts so risky.
Unlike stock trading, forex currencies do not move significantly on a day to day basis. Without leverage, you would need thousands of dollars to make even decent profits. As such non-leveraged forex trading is typically only done by institutional traders who manage millions of dollars in assets.
Most retail traders opt to trade Forex with CFD contracts. This is why ‘forex trading’ has sort of become synonymous with Forex CFD trading.
However, the risks stay the same and is something that is worth reemphasizing.
What to do before starting a Forex trading business
Forex trading can be profitable, but also can cause significant losses. It is very important to learn trading strategies, and practice risk management before you start trading Forex with real money.
Learn Forex trading from scratch for free
The first step to become a successful trader is to learn the basics of Forex trading. Understand the macroeconomic factors that cause a currency to appreciate or depreciate relative to another currency. Learn to look at charts to understand support and resistance levels. Make use of indicators to analyze and predict chart movements. And finally practice these using a demo account without using real money.
Forex CFD brokers like Equiti offer an extensive database of education and news articles to help beginners learn to trade Forex from scratch. Equiti also lets users sign up for a demo account to experiment with various trading strategies before they put in real money.
Build a trading plan as a beginner
Learning to trade Forex profitably is an ongoing process. Once you have learnt the basics and have closed a few positions profitably on the demo account, it is time to start trading with real money.
But before you get there, it is important to build a trading plan.
A trading plan is a set of guardrails that help Forex traders avoid taking rash trading decisions. While a trading plan may evolve over time, it is important for traders to stick to this plan on a day to day basis in order to build trading discipline.
According to Forex broker firm Equiti, your trading plan must include the following guardrails:
- Financial objectives: What position size will you use for your trade? Where do you take profit or execute your stop loss at?
- Trading hours: What markets (London, Tokyo, New York, etc.) do you plan to trade?
- Trading style: Scalping, day trading, swing trading, position trading)
- What currency pairs will you focus on?
- What risk-reward ratio will you apply to your trades?
- What is your entry and exit strategy?
Sticking to your plan helps you measure your progress and minimizes bad trading practices like overleveraging, overtrading, revenge trading, etc.
Find reliable daily market analysis and news for Forex traders
While technical analysis and charts are an important component of Forex trading, the truth is that there is no guarantee of price movement in either direction. The broader movement up or down is governed by economic reports surrounding the Forex market. This includes GDP reports, monetary policies, payroll reports, geopolitical events, and central bank decisions.
According to forex broker Equiti, the following economic news and market events have significant impact on Forex price movements:
- Economic Indicators: GDP, inflation data, employment figures, etc.
- Central Bank Decisions: Monetary policy and interest rate decisions
- Corporate Earnings Reports: Quarterly performance reports
- Geopolitical Events: Elections, trade tensions, and conflicts
Pick the right Forex trading broker
Picking the right Forex trading broker can impact your trading strategies and profitability. Ideally, you should pick a broker who is licensed in the same jurisdiction as you. For instance, if you are based in Dubai, then you should go with a broker like Equiti or Capital that is licensed by the UAE Capital Market Authority.
Equiti, for example, offers trading with tight spreads (as low as 0 pips) and leverage as high as 500:1 for its UAE customers.
Do note that the same parent company may own different entities across different jurisdictions. So make sure you are signing up with the right legal entity.
How to make money by Forex trading
Once you have practised Forex trading adequately and are making money consistently with real capital, the next step is to work on building a profitable Forex trading business.
There are a number of different ways to monetize your Forex trading skills.
Become a solo trader
This is by far the most straight-forward money making opportunity with Forex trading. As a solo trader, you invest your own capital into making money with Forex trading. Given the high risk nature of a Forex trading business, it’s important that you do not deploy your life savings into the trade and only work with money you can afford to lose.
Work with a prop trading firm
A proprietary trading firm (or a ‘prop firm’ for short) is a financial company that invests its own money into the trading market, rather than using client funds. A prop trading firm is popular among family offices that deploy a part of their funds into the market.
If you are a trader with a solid trading plan and history to show, you could work for a prop trading firm and make a percentage of all the profit you make for the company.
Establish a signal trading company
A signal trading company is an algorithmic trading company that sells its proprietary trading strategies to institutional investors for either a flat fee or a percentage of the profits.
Signal traders typically make use of algorithmic trading strategies to enter and exit their trades. Once they have built a history of profitable trades, they sell these signals to interested investors looking to put in their capital.
Set up an Asset Management Firm
An asset management firm helps clients manage and grow their wealth. By registering as an asset management company, you are legally allowed to execute Forex trades with not just your own capital, but also that of your clients.
However, trading client funds is not the same as trading with your own capital and there are stringent guardrails in place to ensure their wealth is protected. For this reason, it’s important that you secure the relevant licenses before you can offer this as a service to clients. If you have an international clientele, you could register a firm on one of the international freezones like the Dubai International Finance Centre (DIFC) or Abu Dhabi Global Market (ADGM).
Firms registering as an asset management company are mandated to secure a special category of licenses and also deposit high upfront capital. Speak with a representative from these free zones to understand these requirements in greater detail.
Establishing a profitable forex trading business
Starting a Forex business requires a solid understanding of the market and a well-defined trading plan. Most importantly, it requires a very disciplined approach to trading.
Whether you choose to trade with your own capital, work with a prop trading firm, or launch an asset management company, it is essential to develop your skills and demonstrate consistent performance in order to be successful in this line of business.
And as it is with everything else, remember that disproportionate rewards always come with disproportionate risks. While high leverage is nice, it can wipe out your capital in no time if you are not being careful. Start with a demo account, and practice live trading only with capital you can afford to lose. Ensure you have a solid understanding of your business as well as the regulations before you look at managing funds of your friends and clients.
