Similarities and Differences of Forex Trading and CFD Trading

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trading CFDs
trading CFDs

Forex Trading and CFD Trading are always being compared. Truth is, they share similarities and differences that one cannot spot instantly if you are new to the market. Understanding these points will let you decide which one perfectly fits you.

Similarities of Forex and CFDs

The most obvious similarity between Contracts for Difference (CFD) and Forex is the trade execution process. Traders in CFD and Forex can enjoy the convenience of fast and easy entry and exit in the market and they can take advantage of the price even in the falling market. Another similarity of these trading styles is that they are being executed on a similar platform, through the use of the same pricing methods and charts. They can be executed in an over-the-counter (OTC) market that is being run by a network of banks electronically and without a central exchange and physical location. Trading CFDs and Forex are also both cost-effective because the only trading cost that they will shoulder is the spread, unlike other trading instruments that charge other finance fees and commissions.

Traders in CFD and Forex also don’t hold ownership of their underlying assets. When they purchase EURAUD, for example, they are not really buying Euros and selling some Australian dollars. Instead, they speculate on the exchange rate of this currency pair, whether the value rises or falls. Also, for CFDs, when a trader buys a stock of an underlying asset, they can only speculate on the price of the underlying asset and cannot own it to themselves. These similarities prove that Forex is just another kind of CFD and vice versa.

Differences of Forex and CFDs

Now, let us determine the differences between CFDs and Forex that will be the deciding point as to which one of them suits you perfectly. The primary difference of CFD trading against Forex trading is that CFDs involve a contract that covers different sets of markets like metals, energy, and indices. But in Forex, it only involves speculating on the price of currency pairs. When trading CFDs, you will also have the chance to choose from the variety of contracts that are different in value and type which solely depends on the origin of the underlying asset that you want to trade. Meanwhile, in Forex, you are trading one currency against the other currency which always involves the trade of uniform lot sizes.

Finally, the last difference between Forex and CFDs boils down to the general factors that have a strong influence in each market. As for CFDs, it is influenced by factors like the supply and demand of a commodity or when there are changes in the trend that associates with the business sector. In Forex, the influencing factor is the global events related to the financial state such as international political changes and employment shifts.

Trading Forex or CFDs can be quite hectic for new traders. Whatever the results, always make sure to study and gain knowledge about your chosen venture to ensure that you won’t suffer huge financial losses.