Choosing a market for CFD trading
Trading CFDs on forex
Rather than physically buying or selling one currency for another, when you take a position on forex with a CFD you’re making an agreement to exchange the difference in price of a currency pair from when you open your trade to when you close it.
Forex CFD prices are based on the underlying market, with the provider’s spread wrapped around them. These prices are displayed in the same format you’d see in the window of a forex exchange, eg 1.278657.
Standard forex CFD contracts are worth 100,000 units of the first named currency in the pair, while mini forex contracts are worth 10,000 units.
One major thing to note when trading CFDs on forex is where your provider gets their prices from.
Because forex is an over-the-counter (OTC) market, there’s no central exchange for trading. Therefore, there are no standardised rates for forex transactions and no official values that CFD providers can use for their own prices.
Instead, providers generally source prices from one of the major forex-trading banks (eg Barclays, Deutsche Bank, JPMorgan, UBS). Some even source them from a number of different banks, choosing the best buy and sell quotes from among them. The more banks that are used by your provider, the more competitive their forex prices are likely to be.
Once your provider has the underlying rate, they will then add a spread on top to create their own prices. This spread is usually variable – mainly because the spread between the buy and sell prices in the underlying market is also variable – and so is liable to change throughout the trading day based on the volatility and liquidity of the underlying market.
For this reason, when advertising their forex prices, providers will often refer to a number of different terms, for example:
- Minimum spread - the tightest possible spread a provider will offer
- Typical spread - the standard dealing spread, used most of the time
- Average spread - the average spread over a given period of time
- Fixed spread - a spread that will not vary, usually applied over a specified period of time
- Capped spread - a spread that will vary, but only up to a predefined maximum
To keep things as simple as possible, most providers will generally only use two or three of the above. Here's how IG presents its forex spreads for some of the major pairs:
|Pair||Minimum spread||Typical spread|
It’s important to understand that the spread could get wider than the quoted typical spread in certain market conditions. If a forex pair is particularly liquid and unlikely to experience wild price swings, a provider will usually only add a small spread. As the market gets less liquid and more volatile, the spread tends to get wider.
When placing a trade, you’ll want to find the tightest possible spread, because the tighter the spread, the less the market will have to move in your favour in order for your trade to become profitable. So it’s important to consider when and in what conditions to enter and exit your positions on currency pairs, as wider spreads could have a significant effect on the profitability of your trades.
More about forex prices
To find out more detail about how we price our forex and other markets at IG, watch our video.
Impact of leverage
When you trade CFDs on forex, you’ll need to put up a margin payment which may only be a small proportion of the value of the currency you’re dealing on. Remember that your potential loss could be much greater than this, however.
- A CFD is an agreement to exchange the difference in price of a forex pair from when you open your position to when you close it
- Forex is an over-the-counter market, which means there’s no single exchange from which your provider can get their prices
- Instead of standardised rates, providers source prices from one or more of the major forex-trading banks
- The more banks that are used by your provider, the more competitive their forex rates are likely to be
- The spread in forex is likely to vary throughout the day based on the volatility and liquidity of the market
- The less liquid and more volatile a market, the wider a spread tends to be
- When you trade forex CFDs, you only need to put down a small deposit relative to the full value of the position