Difference between Forex and CFD Trading

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Know the Difference between Forex and CFD Trading

When it comes to trading in the financial markets, Forex and CFD trading has become the most popular derivative instruments among traders across the horizon. Both offer unique benefits that attract traders looking to gain profit in the financial world by speculating the price movements. However, because of a similar execution process, traders are often left with confusion wondering which one is better between the two.

In this blog, we will explore the key differences between forex and CFD trading and know which one is better for trading.

Forex vs CFD Trading

The foreign exchange(Forex) market is one of the ancient yet most traded financial markets in the world with a daily trading volume of approximately $6.6 trillion while the CFD market emerged in the 1990s. Though CFD trading is a relatively new concept, it has evolved as an impressive trading instrument among traders.

What is Forex trading?

Forex or foreign exchange market is the conversion of one currency into another. It includes currency pairs, i.e., two currencies that are traded against each other. In a pair, the currency that is always on the left is called the base currency, while the other one is called the quote currency, showing how much amount of quote currency will be required to trade 1 unit of the base currency.

In forex, the traders can choose from major, minor, and exotic pairs to trade and earn profit from them.

What is CFD trading?

CFD or a contract for difference is the contract between the buyer (investor) and the seller (CFD broker) to exchange the difference in the value of the instrument between the time the contract was open and closed. In CFD trading the buyer does not actually buy or own the underlying instrument, perhaps he can receive the revenue based on the instrument’s price change.

Difference between Forex and CFD trading

Here is how Forex and CFD trading are different from each other-

Instrument Selection

One of the major differences in forex and CFD trading lies in the selection of instruments. In forex, the traders are limited to currencies. Conversely, in CFD trading, the traders can choose from a variety of instruments.

Most of the trading volume in the Forex market includes eight major currencies that can be traded in 40 to 70 currency pairs as major, minor, and exotic pairs, which is why it is straightforward. However, in CFD trading, trades can trade thousands of different instruments, the common being CFD forex, CFD equities, CFD indices, and CFD commodities. Because of a variety of instruments, it is more complex.

Additionally, with the gain in popularity of the cryptos in the digital asset market, CFD crypto is also gaining momentum among traders.

Contract Sizes

The lot size in forex trading is uniform irrespective of the traded currency pair. Here, brokers offer traders a standard lot of 100000 units. However, they can also offer fractions of the standard lot, i.e., 10,000 units as mini lot, 10000 units as micro lot, and 1000 as nano lot sizes. In contrast to the forex, CFD trading can offer a huge variety of contract sizes with multiple variations in the amount of an instrument that combines to make 1 CFD.

For instance, with equities, 1 standard CFD is one share while with metals it is 100 ounces.

Market Impact

Forex market and CFD react differently to similar factors. In forex, the price movements are majorly influenced by economic factors, global macroeconomic events, and other factors like monetary policy expectations, risk sentiments, large employment shifts in a particular region, etc.

On the other hand, the fluctuations in the price in the CFD stocks trading are subject to factors like the supply and demand of a commodity and trend changes regarding a specific business sector.

Regulations

The forex market is significantly regulated by numerous bodies that ensure that every trader participates in the market within the defined rules and protect them against instances of manipulation or fraud. Thus, making it secure for the traders. In comparison to forex, the CFDs are not widely regulated. Because of a few regulations, the traders may find it riskier to trade in CFDs.

Forex or CFDs: Which one to trade?

Now that we have understood the key differences between forex and CFD trading, let’s see which one is better for you. To answer, the choice of choosing between forex and CFD trading completely depends on your trading goals, risk tolerance, and preferences.

Both possess their own advantages and disadvantages that attract traders. By understanding the similarities and dissimilarities between the two, traders can make informed investment decisions. Some experienced traders who have a clear understanding and thorough knowledge of both concepts, choose to trade both.

Remember that trading involves risks, so traders need to have a thorough understanding of Forex and CFD before investing.

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