Forex trading is gaining popularity in Pakistan. However, still, a majority of investors trade in physical currencies. There are many hurdles and risks in the physical currencies markets that can be coped with the help of online trading. Thanks to the fast-spreading technology, many international brokers have penetrated the Pakistani market, and now online forex trading is becoming a serious business.
Long and short trading
When analysts and market makers talk about Forex, they often refer to long or short investors. While long and short positions in economic matters can be associated with different things, long and short positions in this context do not refer to length but to what assets an investor holds and what he should have.
Long position
If the investor is long, it means that the investor bought and owned the asset. Conversely, if an investor is short, the investor owns the asset to someone but does not yet own it.
For example, an investor with a portfolio of GBP/USD would have 1 long position. This investor paid all costs of owning the asset.
Short position
An investor who sells GBP/USD but still does not own the asset is called short 1 position. The investor has debt to pay off and must fulfill the obligation by buying GBP/USD in the market to deliver.
Often, a short investor borrows an asset from a brokerage firm’s margin account to deliver them. Hoping that the asset price will fall, the investor buys the asset at a lower price to return them to the borrower. If the price does not fall and continues to rise, the short-term seller may receive a margin call from his broker.
CFD trading
CFD Trading means Contracts for Difference. Contracts are based on financial assets, so you don’t need to buy real assets to trade. Instead of trading the currencies in the physical market, you can take both long and short positions with the help of CFD trading in Pakistan. There are few straightforward steps to start CFD trading in Pakistan.
Step one: Open an account.
Open an account with a reputable and popular CFD broker. Log in correctly and fill out the form or log in through your Google / Facebook account.
Step two: Verification
Confirm your details with an ID photo and proof of address.
Step 3: Deposit
Once your account has been verified, the broker will contact you by email. You can then deposit the amount and start trading. Go to “Deposit”, select one of the desired options, select the currency and amount. Within minutes, the money will be credited to your account.
Step 4: Start trading
Once the money is deposited into your account, you can start trading. Analyze the likelihood of trends. Always keep an eye on important assets and the related market news.
Short vs. Long: What holds more risk?
The term “short selling” is widely used in the news. Well-known investors regularly use this tactic. It may be that many high-value funds and investors make a lot of money from short selling, but it is also true that short selling is dangerous. In general, private investors should avoid this because of the following reasons:
Unlimited downside
If an investor has long positions, he cannot lose more than 100% of his investment. This is because when a position goes out of business, the value of your investment can drop to zero. However, if investors don’t invest, the potential losses are not limited. This is because the measured inflow of assets is not limited. If an asset rallies 200% while an investor expects a slowdown, he could lose twice as much money as he invested.
Margin call
When an investor sells an asset, he usually faces margin calls if the price moves in the opposite direction. When these margin requirements arise, investors must bring more money to the broker for the situation to continue. If this additional money is not deposited, the broker releases the position without the investor’s consent. As a result of these constant margin requirements, only active investors can sell in the short term. Private investors are usually passive.
Additional expenses
Another major problem with short selling is that transactions involve certain costs. First, the deal depends on the broker’s ability to find a margin. Of course, the broker-dealer does not do this for free. Brokers pay a commission for this service. Even an investor owes money to people in the market. This is because they borrowed the asset. However, they were not paid to the creditor. When they finally pay the lender, they also have to pay interest. Depending on active trading, this interest expense can add a significant element. Interest rates prohibit investors from going short. Since most short positions are short-term, these trades are usually speculative. Therefore, ideally, the retail investor should stay away from these steps.
Buy-in and Short Squeeze
Short-term trades are inherently volatile. This is because investors have very little control over the traded asset. For example, a lender can pay off a portfolio right away, even if he is willing to pay interest on the asset. This is called a buy-in. These situations force short-term clients to liquidate their positions and pay off the debt to the lender. Likewise, other parties may refuse to sell you an asset, even if you are willing to pay a reasonable price. In such a situation, you cannot buy back the asset and return them to the lender. This situation is known as a short squeeze. It is known that prices will rise shortly. This is because all short sellers quickly close their positions, which leads to excessive demand.
Advantages and Disadvantages of Long / Short CFD Trading
Now, let’s discuss some of the key advantages and disadvantages of CFD trading. The comparison will help you further understand the CFDs, and you will also learn how to capitalize while trading such contracts.
What are the advantages of CFD trading?
Invest in a wide variety of markets
By registering with an online CFD broker, traders can invest in various financial markets through an online trading platform. Traders can access contracts of Forex, stocks, indices, spot metals, commodities, bonds, and ETFs from a single account with a wide range of investment options.
Trade on Margin
With the help of leverage, investors can trade in the markets with a smaller initial deposit. Essentially, leverage acts like a loan that a trader borrows from a broker, allowing to control larger CFD positions in the market by investing a smaller amount of capital held as collateral. This makes CFD trading more affordable and profitable than other investment methods.
No stamp duty
Another reason CFD trading can be more profitable than other forms of investment because you do not need to pay stamp duty when trading a differential contract. Since CFDs are financial derivatives, the investor does not acquire the underlying asset and therefore does not have to pay the stamp duty.
CFD regulations
Other advantages of CFDs include fewer rules than other standard exchanges. In other words, CFDs can lower the investment conditions and therefore require less money in the brokerage account.
What are the disadvantages of CFD trading?
While there are advantages to CFD trading, the investor must also make sure that he or she fully understands the risks associated with trading derivatives.
Leverage (a double-edged sword)
Leverage allows investors to open a CFD position in the market with a smaller initial deposit and carries a certain degree of risk. If a trader opens a position with too big a volume, even the smallest price fluctuations can ruin his entire investment.
Costs can rise in the long run.
While CFD trading can be a cost-effective way of investing in the financial markets, costs can arise over time if positions are held longer and are not managed efficiently. Long-term investors should be aware of additional costs such as overnight swaps.
Volatility in CFD trading
When the markets and the related commodity are highly volatile, the difference between buying and sell prices can be significant. Large spreads affect the prices a trader pays when entering and exiting positions, which negatively affects trading and increases losses.
The Bottomline
Forex trading is getting famous in Pakistan. You can avoid the hurdles of trading in physical markets and start long and short trading online through CFDs. You may not need a too big investment to get started. However, CFD trading comes with a risk, so beware of it.