Forex and Contract for Differences (CFDs) are both popular trading instruments that allow you to trade the asset’s price movements with margin and leverage. Where forex only supports trading currency pairs, you can trade other asset classes with CFDs, too.
It is important to note that both Forex and CFD trading involve significant risks, and you should carefully consider your investment objectives as well as your risk tolerance before engaging in trading activities.
In our article, we compare the two and help you understand what trading products are available to you for you to choose the right ones for you.
Differences between Forex Vs CFDs
Forex trading only involves trading international currencies in the forex market. While selecting the currency pairs, you can choose from major currencies (USD, JPY, EUR, GBP, CHF, CAD, AUD and NZD) that comprise the majority of the forex market.
Traders can also select currency pairs based on their trading strategies in the forex market. For example, if you want to trade with a short-term trading strategy, choose a forex pair with decent momentum in a short time frame.
On the other hand, CFDs can be traded with several underlying assets like currencies, stocks, commodities and more. In CFD trading, there are thousands of tradable instruments in different markets. You can even trade multiple asset classes together.
With CFDs, you can choose a different asset for a different trading strategy. For example, a stocks or commodities CFD is typically used as a long-term trading strategy and cryptocurrency CFD is a short-term trading strategy*.
*This is an example only and is not personal advice. Therefore the advice has been prepared without taking account of your objectives, financial situation or needs.
In forex, the contract size is straightforward and represents the amount of base currency you are willing to buy or sell in a pair. All forex contracts are standardised and come in specific lots. A standard forex lot size is 100,000 units of the base currency. However, you can also start small and trade lot sizes of higher such as 10,000 units or 1,000 units.
In CFD trading, the contract size varies depending on the underlying asset class. Stock CFDs are traded in lots where the lot represents the total number of shares. In this case, buying or selling a trade size worth 100 units will represent 100 units of the particular share traded.
On the other hand, if you are trading commodities CFDs, the contract size is based on the weight or volume of the commodity. For example, trading a contract size of 1 in gold means trading 1 ounce of gold, whereas trading a contract size of 1 crude oil means 1 barrel of oil.
Cost of trading
The spread (difference between the bid and ask price) is the main cost of trading in forex. Forex brokers also charge a commission on trades, which is a small percentage of the total trade value. If forex positions are held overnight, overnight financing fees are applied, which is also considered a part of the cost of trading.
CFDs also have a similar cost of trading as a spread, but unlike forex, it can either be fixed as per the asset class or variable. Commissions and overnight fees are charged differently based on different classes, and so the costing structure is not unified like that in forex.
The forex market prices are affected by global macroeconomic events and financial factors. These factors include large employment shifts, changes in GDP, rise/fall in exports/imports from one country to another, monetary policy changes and more.
Any economic, financial or political event that occurs in a particular country affects its currency prices in the market.
CFD prices, on the other hand, are mainly affected due to specific factors that directly influence the instrument being traded. These factors include changes in trends, changes in a particular sector, rise/fall in demand/supply of a commodity and more.
For example, if a company acquires another company, the price of the former company’s stock may increase or decrease, leaving a similar impact on the stock’s CFD. On the other hand, typically if the global demand for gold falls, so will the prices, which will lead to the gold CFD prices dropping as well.
Forex is a global market that operates 24 hours a day, Monday to Friday. Hence, you can enter and exit positions at any time of the day, irrespective of your geographical location, except on Saturday and Sunday. You can trade the forex market in three main trading sessions: the European session, the US session and the Asian session.
Trading hours of the CFD market differ and depend on the underlying asset being traded. This means if you are trading a stock CFD, it will be traded as per the regular market hours of the stock exchange where the underlying asset is listed. On the other hand, if you are trading commodity CFDs, you will be able to trade them during regular market hours when the relevant commodity market is open.
Similarities between forex and CFDs
Both forex and CFDs follow the same execution process of buying and selling the asset. You place an order through your trading platform, enter stop losses/take profit levels and exit with direct execution. The execution process includes a range of orders like market orders, trailing stop orders, limit orders and more.
Non-ownership of the asset
Both forex and CFDs are traded as a contract that represents the value of the asset and does not involve taking ownership of the physical asset. In forex, you buy and sell currency pairs through an exchange rate between the two currencies but do not actually own the currencies. Similarly, in CFD trading, you trade contracts without owning the asset itself.
Both forex and CFD trading are margin trading instruments, which means that traders can trade with leverage.
Both forex and CFD trading allows traders to go short as well as long. This means that traders can benefit from falling and rising prices, allowing them to take advantage of market movements in both directions.
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