How Similar Is CFD Trading From Forex Trading?
Contract For Difference and Forex are often linked to each other thanks to their similarities. If you have ever traded CFDs and Forex, you will find their very obvious similarities that you will find it hard to differentiate these two trading styles. Let’s take a look at their similarities and how they are also different from each other.
Similarities of CFD Trading and Forex Trading
One of their easily spotted similarities is the trade execution process. In CFD trading and Forex trading, traders are able to enter the market very easily, be it under a rising market or a falling market. Another similarity between CFD and Forex is that their trades are made on the same trading platform, with the use of similar pricing and charting methods. They are also an over-the-counter market and they are mainly run by banks and central exchanges, without having any physical location or offices. Third, let’s go down to their similarities on the financial side. CFDs and Forex brokers only ask for spread as their source of income, unlike other trading instruments that have large other finance fees and commissions as well.
Another common thing about CFDs and Forex is the ownership of the underlying asset. Both of these trading instruments don’t own the underlying asset that they are trading. This means UK traders can enjoy the advantage of not being able to pay for the UK stamp duty. Citing these differences, you can easily say that CFD is just another type of Forex and vice versa.
Differences of Forex and CFDs
There are differences that draw apart these two trading instruments are the contracts that they cover. CFDs can cover a whole range of markets such as indices, commodities, metals, energy, stocks and so much more. For Forex, it can only trade currency pairs and that makes it a hindrance to other traders who are aiming to trade other markets aside from currencies. Additionally, CFDs allow you to select the type of contract according to their currency type and increment value, in provision to the country of origin of the underlying asset. As for Forex trading, it is all about currency trading, one currency is traded to another, and involves the use of similar lot sizes.
Finally, the difference between CFDs and Forex boils down to the influence that it makes on each market. In CFD, what influences it is the supply and demand of the underlying asset, particularly the commodity that changes the prices in the market. Forex trading, meanwhile, is driven by global economic events such as international political changes, employment shifts of large companies, and so forth.
Knowing the differences between CFD Trading and Forex Trading allows you to choose which trading instrument suits you better. If you think that you want to focus on trading currencies, then Forex is the one for you. But if you want to go beyond currencies and explore other markets, CFDs is also a very good option. One important reminder for both of these instruments is to gain knowledge first before you join the market. It is much better to be prepared when joining the battle rather than joining without knowing who your enemy is. It is very enticing because it enables the trader to speculate on the price movements without the need to pay for the full amount of the underlying asset. Additionally, the price of the position will be based on the amount which was borrowed from the broker. The increased value reflects the losses and profits of the underlying asset.
When you look for a good CFD broker, you must see to it that they can offer a good leverage ratio. These leverage ratios help determine the actual value of the trading position related to the capital.