CFD trading (Contract for difference) and forex are fundamentally different, but they also share quite a few similarities. With a forex trading account, you normally get access to both asset classes but there is a case to be made that one can be more favorable than the other depending on your trading strategy and approach.
Similarities between CFD trading and forex
CFD trading encompasses several markets including commodities, equities and indices while forex refers to the trading of currency pairs. However, you could argue that forex is a type of CFD contract, since in both markets, traders are essentially trading on the difference of the exchange rates without actually owning the underlying asset they are trading. This is called speculative trading and it affords the remarkable advantage of being able to trade and profit on both rising and falling markets.
For example, if the price of the EUR compared to the USD is appreciating, you can trade USD for EUR and make a handsome profit. Similarly, if the price of EUR is weakening vs a stronger USD, you can trade EUR for USD for a favorable outcome. This is also true for CFDs on commodities like gold, oil and coffee as well as cryptocurrencies and stocks.
Both forex and CFD trading take place on a decentralized exchange or a network of banks and other financial institutions that all take part in the trading of these instruments. The differences between the two assets mainly involve the factors that affect their exchange rates and how they are traded.
Why CFD trading is different from forex
We’ve already mentioned that when you trade forex, you are essentially trading two different currency pairs. When a country’s economy is doing well in relation to the other economy in the pair, its currency will be going up as well. Clean and simple, but CFDs on commodities for example, mainly involve knowing how the underlying commodity is faring, which can be affected by forces of nature such as floods and droughts - when we are talking about planted goods like coffee - or employee strikes as far as mined goods like silver and gold are concerned.
As you can see, CFD trading is extremely dependent on keeping abreast of the fundamentals. Commodity prices are much more sensitive to supply and demand while forex trading can be considered a bit more stable due to its liquidity. The trading volume in the forex market is enormous and this is an advantage for forex traders because it provides more opportunities to profit since orders are executed extremely fast and therefore the fees are also much more favorable.
While forex is also a quite volatile investment, the market is more predictable due to the various chart patterns and trends that form over time. Paying close attention to the fundamentals like geopolitical events, interest rates and economic growth is incredibly useful for a broader understanding of the market but there are successful forex traders that focus mainly on the charts and price action.
In general, CFD and commodity trading is a lot less liquid than forex and in terms of making predictions, commodity traders need to focus on the fundamentals since they tend to drive supply and demand. There are some agricultural commodities that are more predictable due to seasonality, but the overall market’s rapid price fluctuation can be very challenging for traders aiming to turn a profit from short-term trades.
On the other hand, forex traders can find several entry signals for profitable short-term trades as long as they can bear a significant degree of risk as well. Also, regulation in forex is not as strict and as such there are more opportunities for profit. For example, utilizing the higher leverage percentages available in forex you can control larger positions and boost your profits. Commodity CFDs are also leveraged instruments but in forex you can find more favorable conditions especially in the major pairs. The spreads on these popular currency pairs are also incredibly tight which helps forex traders secure their profit targets much easier.
We can easily surmise that CFD trading is not as advantageous as the forex market where trading conditions are more exciting and favorable even for beginner investors, but at the end of the day, it all comes down to your personal trading strategy and methodology of market analysis.
Fundamental factors play an important part in both markets but forex while being more volatile, presents more opportunities for entry because the market has been proven in some degree to operate within certain parameters and patterns which traders can easily identify with some experience.
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HIGH RISK WARNING:
Trading Foreign Exchange (Forex) and Contracts for Differences (CFD’s) is highly speculative, carries a high level of risk and may not be suitable for all investors. You may sustain a loss of some or all of your invested capital, therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading on margin.
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