Many forex brokers offer trading via Contract for Difference (CFD) in oil, gold, the S&P 500, Dow Jones Indexes, and other commodities and financial products. These are based on futures contracts and don’t trade like currencies.
These other products can be alluring, and they may seem like easy things to trade. After all, oil and gold are discussed all the time on the news, so most people think they know a lot about them. But if you trade currencies normally (or stocks), these other markets may act completely different. The strategy you use in one may not work in another.
We don’t want to assume that we can trade all markets and products, just because we have experience in one market.
In a CFD, the Broker is Against You
Unless you have studied futures trading, I would advise against jumping into these CFDs for a number of reasons.
1) The forex broker is going to charge a large spread, making it harder to profit over many trades. The spread for a CFD is much larger than what is available in the actual futures market, even though the CFD is based on the futures contract.
2) These types of CFDs may not trade like currencies (or other markets you trade). These products are based on futures contracts, which expire, and the next contract may have a very different price. If you don’t close before expiry, you get rolled into the new contract, which is another trade and may be very different (different technicals, even different trend direction).
3) The broker is going to charge you to hold positions overnight. You are trading against the broker in a CFD. They will take their profit from you somehow. This is different than a futures contract, traded on an actual futures exchange, where the broker just facilitates your trade and another trader is on the other side of the transaction.
How CFDs Work in Relation to the Underlying Market
Back in April of 2020, short-term oil prices (futures contracts expiring soon) declined aggressively relative to longer-term oil contracts (expiring later).
May oil was trading at $18, June oil was trading at $25. “May oil” means the contract for the oil expires in May.
During this time, many people thought their brokers were ripping them off, that there was a conspiracy, that the $18 or the $25 contract was “Just forgotten about by the broker” or “Not updated” (actual explanations I heard from traders in a Facebook group). When brokers stopped showing the May contract (because it expired) and switched to the June contract, some people thought the price had gapped $7 instantly.
These explanations were wrong. These were both prices that were occurring at the same time in different oil contracts. The prices were visible all along, as shown on the chart above that includes two contracts with different expiries. Both contracts had been trading for a long time at their own respective prices.
The worst thing is that when I see people pose questions about this on social media, most of the people responding to it don’t know about the different contracts, expiries, or that there can be differences between contracts. These people have placed some currency trades, maybe even many, but had no idea how the underlying markets work in other products like gold, oil, etc.
A few days later, the May oil contract actually went below $0, meaning it was trading at negative prices. Most CFD traders were again confused because they didn’t understand the futures market…they just thought trading a CFD through their broker could make them some quick money.
Back in 2011 retail traders were piling into gold and silver as it ascended. More people started trading gold and silver CFDs as well. Then, the regulators changed the margin requirements to help control the speculation. Prices plunged. Experienced futures traders know such things happen, because it has happened before. CFD traders were likely taken by surprise because they weren’t aware of how the underlying market works.
Small examples of a CFD not really matching the underlying market occur every day. Traders make incorrect assumptions about gold, silver, oil, etc because they are viewing bid and ask prices provided by the broker, and not the real market.
One thing to be aware of is that many free trading quotes/charts on these popular commodity markets are provided by CFD brokers. This is ok, for a basic guide as to where the price is. But free real-time data is not generally showing you the real market with the real bid and ask created by traders. For high-quality true and accurate market quotes and charts, we generally have to pay for it.
Know Your Market Before You Trade
PLEASE! Before trading ANYTHING, study it. Know how it operates. If you can’t open a futures account, or you don’t know what futures are, please don’t trade gold, silver, oil, etc. in the forex account.
You are likely not trading the market you think you are. Just because gold is listed in the same platform where you day trade the EURUSD doesn’t mean you can trade it like the EURUSD. Each market has things to be aware of, including its own hours, regulations, margin rates, and just general knowledge requirements.
CFDs are totally fine to trade if you know and have studied the underlying market you are trading. Although I highly recommend trading the actual product as opposed to the CFD. The odds are more stacked against you with a CFD. If you want to trade gold, for example, open a futures account and trade gold, as opposed to trading a gold CFD.
Research and study come before placing trades.
By Cory Mitchell, CMT
If you are interested in forex day trading, the EURUSD Day Trading Course has specific price-action strategies for trading the EURUSD in 2 hours or less a day.
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.