Basics: FOREX and CFD Education

What is Forex?


Forex, or FX, is a shortened term that describes the Foreign Exchange Market, a marketplace where the world’s various currencies are traded. It is an interbank market created in 1971 when international trade transitioned from fixed to floating exchange rates. As a result of its incredible volume and fluidity, the FX market has become the largest and most significant financial market in the world.

Here are some unique characteristics that are the source of its success:

Forex markets operate 24 hours a day

Superior liquidity: the daily turnover of the FX market totals to over 4 trillion dollars. Meaning that it is easy to trade most currencies instantaneously

You can profit from rising or falling markets

You can benefit from leveraged trading with low margin requirements

There are standard tools available to help you control risk exposure

Excellent transparency: you just need to keep yourself informed.

The Exchange Rate

Forex plays the indispensable role of determining global exchange rates. The exchange rate is the number of units of one nation’s currency that must be exchanged in order to acquire one unit of another nation’s currency. A market exchange rate between two currencies is determined by the interaction of the official and private participants in the foreign exchange rate market.

Market Participants

The main participants in the Forex market are: central banks, commercial banks, financial institutions, hedge funds, commercial companies and individual investors. The main reasons they participate in the Forex market are:

Profit from fluctuations in currency pairs (speculating)

Protection from fluctuating currency pairs in trading goods and services (hedging)

With technological development, the World Wide Web has become a great trading facilitator as it can provide individual investors and traders with the access to all latest Forex technologies and news.

FOREX Market Participants

The Forex market is an international over-the-counter market (OTC). It is a decentralized, self-regulated market with no central exchange or clearing house, unlike stocks and futures markets. This structure eliminates fees for trading and clearing, thereby reducing transaction costs.

The Forex OTC market account for different participants with varying needs and interests that trade directly with each other. These participants can be divided in two groups: those who trade in the interbank market and those who trade in the retail market.

The Interbank Market

The interbank market accounts for three types of Forex transactions: transactions that occur between central and commercial banks, and financial institutions.

Central Banks

National central banks (such as the US Fed and the ECB) play a significant role in the Forex market. As principal monetary authorities they strive for price stability and economic growth. To do so, they regulate the entire money supply in the economy by setting interest rates and reserve requirements. They also manage the country’s foreign exchange reserves that they can use in order to influence market conditions and exchange rates.

Commercial Banks

Commercial banks (such as Deutsche Bank and Barclays) provide liquidity to the Forex market due to the trading volume they handle every day. Some of this trading includes foreign currency conversions on behalf of customers’ needs while some is carried out by the banks’ proprietary trading desk for speculative purpose.

Financial Institutions

Financial institutions such as money managers, investment funds, pension funds and brokerage companies are obliged to trade foreign currencies looking for the best investment opportunities for their clients. For example, a manager of an international equity portfolio is obliged to trade currency in order to buy and sell foreign stocks.

The Retail Market

The retail market executes transactions of smaller speculators and investors. These transactions are executed through Forex brokers who act as mediators between the retail market and the interbank market. The participants of the retail market are hedge funds, corporations and individuals.

Hedge Funds

Hedge funds are private investment funds that speculate with various assets using leverage. Macro hedge funds pursue trading opportunities of the Forex Market. They design and execute trades after conducting a macroeconomic analysis that reviews the challenges affecting the country and its currency. Due to the large amounts of liquidity funds and their aggressive strategies, they are a major contributor to the dynamic of the Forex Market.

Corporations are companies engaged in import/export activities with foreign counterparts. Trading foreign currencies for goods, they are always exposed to currency risks. The Forex market helps them to convert currencies and hedge themselves against future fluctuations.

Individuals – individual traders or investors trade their own funds in order to profit from speculation on future exchange rates. They prefer trading platforms that offer low spreads, immediate execution and highly leveraged margin accounts.


CFD Trading

A Contract for Difference (CFD) offers powerful tools such as leveraging and long/short trading on almost every financial instrument imaginable. You can easily trade on the price change of multiple equity, index and commodity markets, using leverage rates and immediate execution.

Ar-forex ltd offers a great variety of CFDs providing our clients with the access to commodities markets, such as oil, silver and gold, as well as Forex market indices including FTSE 100, S&P 500 and Dow Jones 30.

Why trade CFDs with Ar-forex ltd:

Product Diversity

Ar-forex ltd offers CFD trading on the world’s leading stock indices, as well as oil, gold and other commodities. With such a variety of assets, you will profit from a wealth of trading options and conditions.

Low Margin Requirements

With Ar-forex ltd you can trade CFDs with margins from 1% to 2% (with leverage of 100:1). You can access a larger amount of shares than you would be able to if buying or selling the shares themselves.

High Liquidity: Ar-forex ltd offers competitive spreads with bid/ask quotes that are filled on the spot – without delay.

Lot Size

CFD trading allows you to trade small and odd lot sizes. As a rule this is not a regular practice with basic tools.

Going Long or Short

With CFD trading, you can profit no matter which way the market goes. You can use CFD to go short (if you believe the market will fall) or to go long (when you expect prices to be on the rise).

CFD Terms

What is CFD?

A CFD is an agreement between you and your broker to settle, at the closing of the contract, the difference in price between the opening and closing price of the underlying share.

Meaning that in CFD trading you do not physically buy or hold the underlying share, you trade a contract that accounts for every change of the price of the underlying share.

How do CFDs work?


Because CFDs are traded on margin, you need to deposit your account before you start trading. Rather than pay the full value of a transaction you only need to pay a percentage when opening a position. All you have to do is to make an initial deposit (1% or 2% depending on the required margin level) which allows you to trade up to 100 times your initial capital (leverage up to 100:1).

You must ensure that your trading account always has enough funds to cover any open positions and expenses associated with the market fall.

Trading Strategies

CFDs are traded in units that vary depending on a CFD type.

For example:

Oil is traded in barrels (bbl)

Wheat is traded in bushels (bu)

Coffee beans are traded in pounds (lb)

All units are set to a standardized quantity known as a “lot”. A lot refers to the minimum quantity which can be traded in any given instrument.

CFDs are quoted in the underlying markets. For example, commodities and indices are traded according to their base currency. The FTSE 100 CFD is quoted in pounds while S&P500 is quoted in US dollars.

Overnight Financing

If you hold a position open overnight you pay or receive daily interest adjustments depending on whether you go long or short. Overnight positions are subject to a finance charge by Ar-forex ltd.

Interested in a reliable partner? Ar-forex ltd is what you need!

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