FX trading is always done through pairs, as forex is to exchange two currencies. The first currency in a pair is called the base currency, and the second one is termed as the quote currency or counter currency. For instance, EURUSD is a currency pair to trade Euro against the US dollar. The base currency here is EUR stands for Euro, and the quote currency is USD refers to the US dollar.
Currency pairs are divided into three groups based on their characteristics in the market.
The most commonly traded pairs with the US dollar on one side are called the majors representing more than 60% of the daily FX trading volume. Majors are characterized by:
Currency pairs that do not involve the US dollar are called Crosses or minor currency pairs. They are riskier to trade than majors because of the characteristics they share:
Exotics are the group of currency pairs that involve at least one currency from a small country or emerging economy. Exotics associated with higher risk as they are known as susceptible pairs to sudden economic and political changes. They are also featured by:
CFD is short for Contract for Difference and refers to the type of trading instruments obtaining their value from an underlying asset. CFDs are popular speculative tools that allow traders to participate in asset price movements without fully owning the underlying asset.
CFDs are categorized into five groups depending on their underlying asset as follows:
These exceptional features of CFDs make them very popular for trading:
With CFDs trading, you can participate in many different markets like equities, commodities, spot metals, cryptocurrencies, and forex on one trading platform without having to own physical assets.
CFDs can provide very flexible trading opportunities as they can be traded on both rising and falling markets. If you expect the value of an underlying asset to grow, you can buy a certain number of CFD on that asset or go long. Vice versa, if you think the asset price will crash, you can sell its CFD or go short. So, CFDs give you an opportunity to profits in both directions.
CFDs trading is possible on a fraction of the underlying asset, which means you can enter the market with smaller amounts of money. So, CFD trading is cheaper than trading the underlying asset while it provides you with the same opportunities to profit.
You can use leverage when trading CFDs. Leverage increases exposure on a trade for a certain amount of capital that can magnify profits. However, the leverage also increases the trader's risk.