Should You Trade Forex or CFDs?

When looking to have a strong foothold in forex trading, you need a stronger sense of trading. Besides having your daily Forex update, the requirement also includes a profound understanding of the market and other forms of trading like CFD. Contract for Differences is an agreement that involves a buyer and a seller. This contract specifies that the buyer and the seller agree upon the terms of payment.

Basic knowledge

Forex refers to the trading that involves currencies. The market is vast, global, and open to all investors. In comparison to forex, CFD is a bit complex. The contract that involves the buyer and the seller carries the agreement of the price of any underlying asset depending upon its entry and exit price.

The points of similarities

A comparison of similarities has been done to give you a wider spectrum of how CFD and forex are similar. This will bring you a proficient understanding of both and will help you to choose the one that looks more promising. Here are the pointers of similarities.

a) The similar trade execution process

This is the first point of similarity of forex and CFD trading. The pricing method and the looking chart for both are the same. Additionally, the decision of entering and exiting the market is always there with the traders. They do have the leverage to keep trading or to exit the market when it’s rising or falling respectively.

b) No ownership of the underlying asset

Irrespective of the trading option you choose (CFD and forex) to trade, you don’t have the ownership of the underlying asset. This is another similarity between these two. When trading, you simply speculate if the price of a commodity for trade will rise or fall.

c) Option to trade for long or short term

The forex trading market has high liquidity. This allows traders to trade during uptrends and downtrends. In the case of CFD, the traders are allowed to speculate on the price in either case when the market is observing a rise as well as when the price is falling.

The points of differences

Just like similarity, Contract for Differences and forex differ in so many ways. Now that you have the similarities in your mind, let’s have a look at the differences. Knowing both the pointers is again important to choose the trading method that suits your style of trading. Here are the points of difference.

a) CFDs allow more flexibility than forex

With CFD trading, the traders have an option to trade in various kinds of contracts. This helps them cover a wider variety of markets. With forex, trading is only limited to currencies. With Contract for Differences, the traders can choose contracts that differ in currency type and increment value.

b) Specific factors influence CFD; global events drive forex

When trading forex, you might have noticed that events such as international politics, global unemployment, pandemic, etc. impact the market. But with CFD, factors such as demand and supply of any commodity influence the market.

c) Forex operates 24*7, CFD timings are limited

Another point of difference between Contract for Differences and the forex is the market for forex trading operates 24 hours for five days a week. This allows investors to access trade globally as per their will. The case with CFD is the trading timings are limited. The timings generally depend upon the underlying asset market.

Which trade method to use?

The similarities and differences quoted here are good to analyze before starting with any kind of trading. The choice should solely depend upon what suits your trading style the most. Both have pros and cons as well as advantages and disadvantages, so a well-analyzed decision will help to go with the one you liked the most.

Final thoughts on forex vs CFDs

When you have a sound understanding of forex trading and CFD, it becomes easy to choose your options. Thus, the points of similarities and differences mentioned here are good to acknowledge. In case, you wish to gain more information, keep learning about the market and explore it as much as possible.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes