Forex and CFDs (Contracts for difference) have some differences and similarities that every trader should know. Both are useful for speculation, but learning about them allows traders to decide which one suits them best. Depending on the situation, one might opt to use them both. Having a trading strategy helps you to decide faster, but it is still important to learn about both.
Forex is trading various currencies against each other. The forex market is large and available to all interested investors, with a trading volume per day of over $5 trillion. CFDs are a little more complex than forex.
A CFD is a contract between a trader and a broker, where they agree on handing over the difference between an entry and exit price of any underlying asset. These contracts are useful for forex market speculation, but also useful on betting on assets like oil and precious metals and indices.
When are trading CFDs, you have a lot of flexibility in the choice of currency trades and the increment value you want to use. The profits or losses the investor gets are calculated by the difference between the entry and exit prices, and the amount multiplied by the CFD units.
Make an effort to learn more about Forex and CFDs before you start trading. By reading extensively and looking for a mentor or a reputable broker, you can trade with ease.
Differences Between Forex and CFDs
Forex and CFDs have some notable things differentiating them. As mentioned, CFDs have some more flexibility because they offer several contracts with varying currencies as well as increment values. Another glaring difference is the key price determinants.
The CFD prices depend a lot on the supply and demand of the traded underlying asset. In contrast, currency values rely more on factors such as the current policies or economic indicators. The forex market is open for 24 hours, five days a week, which offers investors globally access to trade when they want. CFD trading times are limited, depending on the underlying asset market.
Similarities Between Forex and CFDs
Both Forex and CFDs do not deal with the tangible assets, and they are both OTC (Over the Counter). The transactions are decentralized, which means the transactions happen via a financial institution network. Both Forex and CFD trades are executed similarly and also trade via the same platforms. This has led to various service providers offering platforms that traders can use to trade both Forex and CFDs such as the Metatrader 4.
Both Forex and CFDs offer access to a margin for leverage. The margin harnessed by investors when they trade CFDs is referred to as a fixed percentage. For example, if a contract has a 20% margin, it means you can put down 20% of the contract’s market position value and borrow what remains.
The margin in Forex is seen as a ratio like 1:5, 1:10, etc. For instance, if you have a leverage ratio of 1:10, you can enter into $10 worth of trade for each $1 in your account. Forex and CFDs are also similar in that their trading costs slightly rely on the difference between the entry and exit points or the spread.
While Forex and CFDs are similar in many ways, they have some differences you must know about. Learning what sets them apart allows you as an investor to make more informed decisions about which one to use in your trading strategy.
Success in trading comes making efforts to learn everything you can about the market. Having a trading strategy allows you to trade with a plan, and avoid making losses. A reputable broker will guide you through the process if you are a new trader. Buy books on Forex and CFDs and learn all there is to know. Online resources can also help you out as most brokers have websites with dedicated blogs to educate their clients.