Principles of CFD Trading

Different currency pairs available for trading in Forex currency market represent some kind of a prototype of a contract for difference. Indeed, currency market includes all the necessary components such as a pair of instruments, difference between Bid and Ask price (spread), marginal leverage, commission payment for using leverage. The only essential difference between currency trades and standard CFDs which are committed to a single trading platform is interbank nature of the currency market where traders have to use quotes given only by their brokers.
With the exception of the given difference, the whole process of trading in the Forex market may generally be treated as contracts for difference in currency pairs. Even more, some respectful American brokerage firms are likely to hold this point of view. In other respects the nature of trading in currency pairs remains the same as it used to be before CFDs emerged.

The CFD-based principle of security trading is practically identical to foreign exchange market trading principles. The difference is that CFD trading implies relation of the traded security to the currency. The primary role here is dedicated not to the process of the transaction, but to the process of evaluating the appropriate leverage and margin. The process of making a deal is to some extent standardized and its observance helps brokers engage new clients. At first sight this factor seems not to bear much importance unlike spread for example, but then it becomes evident that rather volatile market may bring massive losses for brokers as well as for traders in case when the leverage has not been evaluated accurately.

At this point, there are many techniques of calculation of the leverage as it may work well in a certain type of the market bringing losses in another one. In other words, there is evident need in a certain powerful mathematical device which can be adjusted to different conditions of volatile market, allowing to calculate relevant margin in every monetary instrument. Besides, some advanced companies even now are ready to offer their clients calculation of the most appropriate leverage in each instrument in particular accompanied by calculation of the most relevant margin for the whole complex of services.

All the above-mentioned principles related to currency and stock markets may also be implemented in commodity market with an exception that the later one is the most conservative among all types of market. Let us say a couple of words about London Metal Exchange (LME) for instance, where some contracts keep being traded within the certain limited group of brokers with no possible access for an out comer. Here a brokerage firm will probably find out itself in a tight corner facing difficulties in access to appropriate terms of the direct market in order to provide liquidity and availability of CFD in trading positions.

The general conclusion driven from the above-mentioned considerations is that providing and maintaining of CFD service is a complicated process requiring many efforts. It needs a complex solution of a series of important issues starting from analytical trading service and finishing with its technical support.