Financial Products to Trade
Forex stands for foreign exchange and represents the currency market. In such a market, traders buy or sell currencies, betting on the future move of a currency and/or currency pair. If a trader thinks the policy in the United States is about to result in a higher U.S. dollar, then the trader may buy the American currency against other currencies. In doing that, it is trading currency pairs on the Forex market.
Because of stiff competition between brokerage houses, besides currency pairs, there are other products offered for trading. These are intended to widen the range of the products offered and to keep traders involved and active all the time.
The Dashboard of a Forex Broker
For the reasons mentioned above, the dashboard of a forex broker is quite diversified and this is a good thing from a money management point of view. Besides currency pairs, commodities are offered too, indices, as well as CFD’s (Contracts for Difference). Let’s discuss a bit about the money management that should be part of a complex trading plan. By the time the account is funded, a good diversification will be to split the trading amount among various financial products or categories the broker offers.
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Following the logic, the Forex market will have a specific portfolio, commodities another one, and so on. It can be that in a period of time the Forex part of the trading account is incurring losses but the indexes part is having a profit and this way the trading account is rebalancing. This is what diversification in a trading account is. However, it is possible only if the Forex broker is offering these other products and if the trader has the knowledge to trade those markets too, as they are moving based on different principles than the Forex market.
Being a Forex broker, the bulk of the financial products offered are currency pairs. There are so many currencies in this world that are moving daily that the broker needs to pair them all. But not all of them are moving in the same direction/way and are affected by the same factors. For this reason, a typical Forex broker is listing only popular currency pairs, the ones that are traded by people and therefore have a big liquidity.
Imagine that a broker will not list the EURUSD pair, which is the most liquid one and the most popular one among Forex traders. That broker will have no chance of surviving because traders will avoid opening a trading account with it for the sole reason that the currency pair is not offered. The role of the U.S. dollar is key in categorizing the currency pairs. The ones that have the dollar in their componence are called majors, and the other ones are called cross pairs. The minor pairs are further split into different categories, but the main idea is that the major and cross pairs are the ones that form the currency pairs offered for trading. Everything else is just details.
Any Forex broker is offering commodities to their clients. Classical commodities are gold, oil, and silver. If these classical commodities are not part of the broker’s offer, traders are reluctant as it means the broker has some liquidity issues in the sense that there is no access to such markets. No liquidity providers for these instruments is a bad thing for the broker.
Spreads are different for commodity instruments and currency pairs. In a way, it is only normal because the financial products are different too. There are different factors that affect the two product types, even though sometimes the markets seem to be correlated. Just for the sake of giving you an example, imagine that the Canadian Dollar (CAD) is strongly correlated with the oil market. This makes the USDCAD and other CAD pairs to move in tandem with the oil prices. However, the CAD pairs will move based on the Bank of Canada monetary policy too, so trading them is more difficult and requires a lot of time and dedication, as well as resources.
Indices are nowadays part of any Forex broker’s offer. The main European and American indices are offered for trading, as well as some Asian ones. Markets are correlated most of the times and move based on different factors. However, when they move, they form different patterns that can result in correlated trades being taken.
For example, the DJIA (Dow Jones Industrial Average) is known to be correlated with the JPY pairs for quite some time now. This means that when the index is moving to the upside, the JPY is being sold, or the USDJPY, the main JPY pair, is moving to the upside as well. If traders notice a bullish pattern on the DJIA, like a pennant, or a falling wedge, they will focus on the long side on the USDJPY pair as well. For the record, bullish means price will move to the upside and long is the equivalent of buying. In this way, correlations between different financial products led to a trade on the currency market. This would not have been possible if the DJIA was not offered by the Forex broker.
Besides the DJIA, other important indices offered for trading are SP500, Nasdaq, Russel (in the United States), Xetra Dax in Germany, Cac40 in France, Nikkei in Japan, etc. The way the stock market is moving plays an important role in the way the Forex market is moving and this is the main reason why such indices are offered for trading in a Forex account.
Contracts for Difference (CFD’s)
CFD’s are relatively new products and they are referring mostly to most popular companies in the world. A contract for difference allows traders to speculate on the share price movements of a company. For example, if one believes the share price of Volkswagen (VW) is going to increase soon, buying a CFD on that share price is indicated. If indeed price is moving to the upside, by the time the trade is closed a profit is being made. This profit is the difference between the entry and the exit price. Hence, the name of a contract for difference (CFD).
The drawdown of these products is the fact that they are being offered on high commission and requires a lot of margin that is blocked in the trading account. However, the fact that are offered is a good one as they represent just another way to diversify a portfolio. As you can see, all these product types are being part or should be part of any serious Forex broker. This article shows only some of the products that are offered, but the possibilities are numerous.
For example, on the commodity side, other instruments like platinum, coal, palladium, iron ore, cotton, cocoa, etc., can be offered. This is only to show you the possibilities out there, and, as a rule of thumb, the more products are being offered, the better the Forex broker is.
Recommended Further Readings
- Forex Trading – Explaining the Concept
- Why Trading Forex?
- What Makes a Good Forex Broker?
- Why Trading with a Regulated Forex Broker?
- Benefits of Mobile Forex Trading
Other Educational Materials
- Off the cliff and back? Credit conditions and international trade during the global financial crisis.Chor, D., & Manova, K. (2012). Journal of international economics, 87(1), 117-133.
- “Financial innovation and first-mover advantages.”Tufano, Peter. Journal of financial economics 25, no. 2 (1989): 213-240.