Which is better forex or CFDs?

Foreign exchange (forex) dan contracts for difference (CFDs) have different characteristics, although there may be some similarities in how they are traded.

Continue reading as we compare CFD trading with FX and examine the unique characteristics of each.

What are CFDs

A contract for difference (CFD) is a type of financial derivative. It’s a contract that enables traders to speculate on the price changes of financial assets like stocks, commodities, indices, or currencies. In a CFD transaction, the parties agree to exchange the difference in price at the beginning and end of the contract rather than the real assets themselves.  

As a result, it is no longer necessary for participants in the transaction to own the underlying assets. By speculating on the price changes of assets, CFDs give traders a way to possibly profit from market opportunities, whether rising or falling.

How do CFDs work?

As already discussed, traders use CFDs to speculate on the price alterations of numerous assets without really owning them. For instance, traders can purchase or sell CFDs which reflect the prices of the financial market instead of purchasing gold or silver directly.

A trader may go long on a certain asset and then sell the CFD for a profit if they anticipate that the price of the product will increase. 

A trader may go short on a certain asset if they anticipate a decline in the price of the asset. This indicates that the trader uses the CFD to sell the borrowed item before eventually buying it at a cheaper price to benefit from the price difference. This is also known as “short selling”.

What is foreign exchange?

Forex is also known as FX, foreign exchange or currency trading. Trading forex always involves converting a single currency into another and trading a pair of currencies. In forex trading, a currency pair is a measurement of two distinct currencies, with one currency’s value being quoted against the other.

Bagaimana cara kerja trading Forex?

When trading forex, currencies are not physically exchanged; instead, they are purchased and sold by their exchange rates. Similar to exchanging money before travelling abroad, the transaction is completed electronically using platform perdagangan that operate in an over-the-counter (OTC) type of market.

Traders speculate on exchange rate changes to potentially generate revenue. They buy a currency pair if they anticipate a gain in value and sell it when they anticipate a decline.

Since it is not confined to a certain location and transactions are conducted electronically between traders all over the world, the forex market is open every day of the year. Sydney, Tokyo, London, and New York are the four main trading sessions; each has different trading features and liquidity levels.

CFDs & Forex: Similarities

There are many similarities between CFD and Forex trading. First, the trade execution method is the same for each type of trading. Both rising and declining markets provide traders with simple entry and exit points. Second, the same platform is used to conduct CFD and forex trades, and both use similar-looking charts and pricing strategies. Both transactions take place in the over-the-counter (OTC) market, which is a network of banks that operates fully electronically without a physical site or central exchange.

CFD and Forex trading have another similarity in that there are no commissions or other financial costs associated with CFD trading or forex trading; the only cost involved is the spread in forex trading.

Below are some more similarities:

Liquidity: Both CFDs and FX have significant market liquidity. This suggests that you can place your order anytime and at whatever price you like. It also indicates that you have complete freedom to enter or exit any CFD or forex position at any time.

Speculation: Trading CFDs or FX does not need you to be the owner of the underlying assets. You merely make assumptions about how their prices will fluctuate. You may buy the EUR/USD currency pair, for instance, without ever exchanging any USD for actual EUR.

CFDs & Forex: Differences

Trading CFDs and forex have several differences, but the key one is that CFDs are products that get the value they have from an underlying asset rather than the actual item. Contrarily, although you can trade forex using CFDs, forex trading entails trading fiat currencies.

Another distinction between CFD trading and the trading of currencies is that the former involves several contract types encompassing a wide range of markets, including indices, energy, and metals, while the latter provides just currency trading. When you trade CFDs, you have the choice of several contracts that, according to the nation from where the underlying asset originates, differ in value and currency type. When trading in forex, identical lot sizes are always used. Forex trading involves exchanging one currency for another.

One last distinction between CFD trading and forex trading has to do with the general factors that frequently affect the various markets. The supply and demand of a particular commodity or shifts in industry trends are two examples that have a significant impact on CFD trading. On the other hand, major developments in the global economy or politics tend to be the key drivers of forex trading.

Other differences include:

Structure of trading: Contracts for difference (CFDs), a type of financial derivative, must be set up with brokers. Forex trading is more probable to take place directly between two parties than through a broker, even though forex derivatives may need one.

Charges: When quoting CFDs, CFD brokers add their fee, known as the spread, to the difference between the current price and the future price. There is no spread when comparing one currency to another; the value is indicated in terms of forex pricing.

How to choose CFDs over forex and vice versa

Availability: The CFD markets aren’t always accessible as they are banned in some countries. You can access CFDs, nevertheless, in a lot of other locations. There are forex markets available all around the world, and you may trade them directly through authorised exchanges or you can do so through broker forex.

Market diversity & flexibility: CFDs let you trade a larger variety of assets, including forex, as opposed to forex, which restricts you to just currency pairs. Commodities, indices, equities, ETFs, currency, and more may all be traded using CFDs. These marketplaces provide a wide range of options and help you diversify your portfolio and hedge your transactions.

Price-related factors

The supply and demand of the underlying asset are frequently the determining factors in the price of CFDs. If demand for an asset rises, then demand for the related CFD rises too. As a result, CFDs are ideal for trading price fluctuations because all you need to do is watch the underlying asset’s movement.

Fundamental variables are a big part of what moves the forex markets. Because of this, factors like geopolitical changes, regulations from governments, and other financial indicators greatly affect currency exchange rates.

Forex would be perfect if you are interested in using fundamental research to plan out your transactions or to time them.

Disclaimer:

This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.