Munich Personal RePEc Archive

The use of contracts for difference (‘CFD’) spread bets and binary options (‘forbin’) to trade foreign exchange (‘forex’) commodities, and stocks and shares in volatile financial markets

Barnes, Paul (2021): The use of contracts for difference (‘CFD’) spread bets and binary options (‘forbin’) to trade foreign exchange (‘forex’) commodities, and stocks and shares in volatile financial markets.

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Abstract

This paper examines the popularity of forex and derivatives - contracts for difference (‘CFD’) spread bets and binary options - at a time when the markets are turbulent and speculating by trading is popular. The paper provides theoretical calculations of the probability of success of trading in this way together with empirical evidence. These show that it is not possible for the trader to trade profitably over the medium- to long-term as these markets are efficient and that the broker, who is the counterparty, will win just like a casino or bookie. It is also shown that these markets have become susceptible to scams and fraud but argues such actions are unnecessary for the broker as it will win as long as the trader continues to bet. Finally, it is argued that whilst forex is the most popular asset traded, its price movements are more difficult to predict and are much smaller compared with stocks and shares and commodities, making it even more difficult for traders to trade them successfully.

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