When it comes to short-term day trading, Forex and contract for difference (CFD) are some options that pop up in a Google search. Neither market should be whimsically entered by someone without trading experience, especially when it comes to CFD trading. This article will go over the differences between both types of trading without any fluff or hype.
CFD trading itself shouldn’t be considered a financial market, but rather a method of trading derivatives. The basic idea is to trade through a third party to make a bet on the market without actually purchasing the goods themselves. It can be applied to stocks, commodities, cryptocurrencies and even the Forex market.
A CFD will contain price differences on its entry and closing price and the rate is arbitrarily set and may differ from the live market. The buyer will receive the difference if it is higher than the agreed closing price, but it will come at a loss if it is lower than the entry price.
Only a small margin deposit will be placed on a trade, which is one of the most valued aspects of CFD trading. A really low up-front amount can be put up, like 5% of a trade. These high margins can be dangerous in the hands of irresponsible traders but have big potential for those that know how to use it.
There are certainly risks of CFD trading, especially considering that the contract usually has its arbitrary pricing compared to the live market. Using reliable CFD brokers would be a good start, and especially those that have prices closer to market value.
In its own right, the Forex market is quite diverse you have currency pairs from all around the world with a variety of trading methods. Trading regulation varies greatly by country, but it is much less regulated than other markets, like the stock market.
There is a lot of overlap with the way CFD and Forex trading looks, especially considering that so many Forex brokers already offer leverage. Forex can be entered dynamically through over the counter trades and is even more decentralized than the nature of CFD trading.
If you’re only trading Forex, you’re limited at trading government-backed currencies. If you follow closely international events and international trade, this may be the better market for you. After all, the price of fiat currencies is mostly influenced by politics and policies of central banks rather than assets that may be backing them.
With a CFD, you can enter and exit any market without going through traditional trading processes. For an experienced trader looking to diversify, a CFD will offer an easier, short-term fix. Forex trading, on the other hand, is much more of a liquid market compared to other markets where you can use CFD.
If you are looking for over the counter trading, either Forex or CFD are solid options. A CFD only has the advantage of applying to nearly every market while Forex is centered around currencies.
If you are looking for long-term trading, you should stay away from CFD since it is more equivalent to making bets and being pragmatic in current market events. Forex, while still volatile, is better for medium to long-term holding if you have confidence in a certain currency pair.