The trading world is inherently complex. And the abundance of information on the Internet doesn’t do any favours. Terms like Forex and CFDs are casually thrown around, making it difficult to choose a trading instrument.
While both CFD and Forex involve speculating on price movements, they differ in scope and application. Your unique trading style and long-term financial goals also influence your decision. Let’s take a closer look at CFD trading and Forex trading, and break down key differences.
What Exactly Is CFD Trading?
CFD stands for Contract for Difference. In its essence, a CFD is an agreement between you and a broker on whether the price of an asset will go up or down. These assets can be stocks, commodities, or even Forex.
With CFD trading, you don’t necessarily own the asset, but just trade on the price movement. It is an excellent option for trading looking to make short- and medium-term moves.
What About Forex Trading?
Forex trading primarily involves trading one currency for another. Forex traders aim to profit from fluctuations in exchange rates between currency pairs. Traders can look into both major (EUR/USD and USD/JPY) and minor (EUR/GBP and AUD/JPY) currency pairs.
Look at it this way: When you buy EUR/USD, you believe the Euro will strengthen against the U.S. dollar. And if you’re right, you can keep the difference.
The foreign exchange market is the world’s largest decentralised marketplace, where nearly $7.5 trillion exchange hands as hedge funds, financial institutions, and independent traders make moves.
Underlying Assets
The biggest difference between CFD and Forex trading comes down to the underlying asset being traded. Forex focuses on currency pairs, such as EUR/USD or GBP/JPY. CFD trading, on the other hand, involves a broad range of assets. This includes shares, commodities, stocks, and indices.
When looking for the best CFD trading platform, make sure it facilitates trading gold, oil, and company stocks.
Market Hours and Flexibility
The foreign exchange market never sleeps. Yes, it facilitates trading 24/5, but governments, businesses, and traders are spread around the world, so trading never really stops. When New York closes, London opens, and so on.
CFD trading hours are a little complicated. You need to look at the trading hours of the underlying asset. For instance, if you want to trade Tesla CFDs, you will have to wait for the U.S market to open. The good news? It can facilitate focused trading and strategic decision-making.
Market Depth and Liquidity
As hinted earlier, the foreign exchange market is the largest over-the-counter trading market. This means massive liquidity, tighter spreads, and clearer entry and exit points.
The liquidity of CFD trading varies. Major CFD stocks and commodities have high liquidity, but the rest might come with wider spreads and slippage.
Which One Should You Choose?
There is no right or wrong option when it comes to choosing between CFD and Forex trading. Consider your trading style, long-term goals, and available resources.
