If you’re a trader, you know the peculiarities within the industry can be really interesting. Different instruments in varying sectors can have similar trading characteristics and principles, and sometimes it might feel like trading either could lead to the same outcome. Take CFDs and forex trading, for instance.
Both are derivatives and speculate on the price movement of their respective instruments. Furthermore, both trade on the same platforms, have similar-looking charts and traders use the same process to enter and exit positions on the best trading platforms in the UK. Which begs the question, which one is better? This piece will look at the differences and similarities between CFDs and Forex trading and try to determine the better option.
What is CFD Trading?
Trading contracts for difference or CFDs are the derivative products of financial instruments such as shares, forex, indices, or commodities. They allow you to buy and sell these instruments without owning the underlying assets. Furthermore, CFDs act as a speculative tool that enables you to hedge your trading position by only agreeing to exchange an asset’s price movement at the inception and close of the contract.
Moreover, you can short or hold a long position on an asset’s price, which allows you to profit despite the direction of its movement. And unlike buying shares directly, which can be expensive, CFDs are a leveraged product that allows you to hold substantial positions without committing as many resources as you do in the former.
What is Forex Trading?
Forex (FX) is a portmanteau of foreign currency and exchange, which involves interchanging one currency for another. Trading occurs on the forex exchange market, the most significant being London, New York, Tokyo, and Hong Kong, with an average daily trading volume of $5 trillion.
It is run by a global consortium of banks that operate on an over-the-counter basis. Trades occur in currency pairs represented by a base and quote currency. The base currency is the one that appears first for a given pair, while the quote currency comes second.
Furthermore, the forex market is a derivative product that speculates on the price movement of different currencies, which can be from any country in the world. Their prices are usually affected by supply and demand, government policies, news stories and other factors such as a country’s employment rate.
Similarities Between CFDs and Forex Trading
- CFDs and forex traders use a similar process and trade on the same online platforms using charts and pricing systems that look the same.
- In both cases, you can short or take long positions depending on how you think the market will move.
- Both trades are carried out electronically on over-the-counter markets through a bank network. Furthermore, there are no physical locations or a central exchange running the operation.
- You only pay spreads on CFD and forex transactions.
- They are derivatives that speculate on the price movement of instruments, and you don’t own the underlying assets.
Differences Between CFDs and Forex Trading
- CFDs consist of different types of contracts ranging from a broad market set and instruments such as indices, metals, or stocks. While on the other hand, forex trading only involves speculating in currencies.
- CFDs are flexible in their contract formulation. To manage budgets, you can vary the underlying asset’s size to your preferred amount. Contrary, forex trading involves strict currency pairs and standardised lot sizes that are inflexible.
- Factors such as the demand and supply of the underlying commodities and trends affecting them in their specific industries influence CFDs’ price movements. On the other hand, currencies are a bit more complicated. They are not only affected by supply and demand but also by factors such as global events, inflation rates, and world politics.
Which one is Better?
Honestly, trading either could lead to favourable outcomes for any trader. Both exchange punches pretty evenly, and the trading process is almost similar. However, forex trading is superior to CFDs in our books. This is because there will always be demand for currencies, and their sheer volume and available trading strategies give you better opportunities to earn on your trades. The forex market is also quite well-regulated, available in all regions and more predictable than CFDs, making it the safer option.