Forex & CFD trading
Having a good knowledge of both CFDs (Contracts for difference) and Forex is helpful for traders as the traders can use the knowledge in coming up with successful speculations. A trader can only know which between the two best suits their objectives once they learn more about the two.
Before getting into the differences and similarities between the two, let us first look at the basics about each of them.
Contracts for Difference (CFDs)
Commonly known as CFDs, Contracts for difference are popular Over-the-counter (OTC) financial derivative products that enable the trader to trade on the price movement of shares and exchange traded funds, cryptocurrrencies, indices futures as well as commodity futures. CFDs are specialized OTC financial derivative products.
Forex
Forex market is where currency exchange takes place. In order to carry out foreign business and trade, currencies have to be exchanged. For instances, businesses such as tourism cannot take place without the exchange of currency. It is for this reason that forex is one of the most profitable and important businesses in the world. Forex market is valued at about US $2,000 billion.
Correlation between forex and CFDs
Decentralized market
Both forex and CFDs are forms of Over-the-counter (OTC) market. Both trades do not involve a central exchange or a physical location. The trades are entirely run electronically and traders from various parts of the world can take part. In addition, in both forex and CFDs, the only cost that traders incur is the cost of spreads. No commissions or finance fees are charged.
No ownership of the underlying asset
The other correlation is that both forex and CFD trader do not own the underlying asset. Instead, they speculate on the underlying price of the asset. In both trades, there is no transfer of physical assets.
Same Platforms
Both forex and CFDs can be done on the same platform. Forinstance, traders can use platforms such as MT4 and MT5 for both forex and CFD trading. CFD and forex trading are usually executed in the same way. Traders can easily download MetaTrader4 (MT4) or the MT5 and commence trading once they open a trading account. For instance account holders on Go Markets platform can use the Go Markets MT4 or MT5 for their trading.
Differences between CFDs and Forex
Type of contracts
While forex trading purely involves exchange of currency, CFDs involve various types of contracts including indices, metals like gold and energy (oil in particular). In fact, stock indices are one of the most popular forms of CFD trading. Forex trading involves trading one currency against another. For instance, trading the US dollar against the Japanese Yen.
Influencers
While forex trading is influenced by global events like international political changes, CFD trading is influence by specific factors such as trend changes linked to business sectors, or the supply and demand of a particular commodity.
Working hours
Forex traders have the luxury of trading 24 hours a day during the weekdays while CFD traders trade according to the supply and demand of the underlying asset. With the Go Markets MetaTrader4, also known as, Go Markets MT4, forex traders can trade anywhere anytime by using their mobile devices.
Conclusion
By being conversant with the differences and similarities between CFD and forex trading, traders can make better decisions and know how to best incorporate forex and CFDs in their trading plan.
