CFD versus Forex trading for beginnersBy Staff Writer 8 December 2021 | Categories: sponsored content
Beginner traders who are just starting out in online trading in currency markets, and others, will soon find that they have a plethora of trading opportunities available to them. Several financial markets can be traded, each offering a wide range of financial instruments.
Two of these trading opportunities relate to Contracts for Difference and Forex Trading, with both options discussed in detail below. CFDs and forex share some similarities as they both involve the same trade execution process.
In addition, beginner traders can also enter and exit the market in rising and falling markets without any issues. Both forex and CFD trades can be carried out over the same trading platforms.
Traders can also apply a variety of charts and pricing strategies, with both options being executed over-the-counter (OTC).
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Differences between Forex and CFDs
An inherent difference between CFDs and Forex trading relates to the fact that with forex, traders own the currencies that they exchange. With CFDs, users are speculating on price movements without owning the underlying asset.
Another difference between trading forex and CFDs relate to CFDs being inherently more complex than forex and it also offers more flexibility because there is a range of contracts that can be traded. Price determinants also set these two options apart, with CFD pricing depending on supply and demand of the underlying asset that is traded.
Forex trading and the value of foreign currencies depend on technical and fundamental indicators, including economic indicators, policies, and others.
Forex can be traded 24 hours a day, 5 days a week. CFDs, on the other hand, can only be traded when the underlying market is open. Forex trading contains a plethora of different currency pairs, while CFDs can be spread across a huge range of financial markets, including:
- Precious metals, and so on.
Advantages and Disadvantages of Forex Trading
The Advantages of Forex Trading are:
- A low barrier of entry into trading a wide range of different currency pairs including major currencies, minor currencies, and exotic currency pairings.
- Low trading costs which can be attributed to the high liquidity in the market, with millions of participants and trillions in trading volume daily.
- Forex derivative trading suits any given trading style and trading strategy including day trading, swing trading, momentum trading, position trading, automated trading, algorithmic trading, hedging, scalping, and others.
- The forex market is one of the most liquid markets in the world with a high daily trading volume, which means that trades are executed quickly and there is no price manipulation or price anomalies
- Forex is traded OTC, which means that there is no central exchange or single market regulator for the foreign exchange market.
- Traders can earn high potential profits
The disadvantages of Forex Trading relate to:
- There is a lack of transparency
- Traders are exposed to different risks including exchange rate risk, counterparty risk, and others when they deal with derivative products
- There are complex price determination processes
- High risk involved with high leverage ratios
- There is self-directed learning involved
- High volatility from price fluctuations can lead to loss of capital
Advantages and Disadvantages of CFD Trading
The advantages of contract for difference Trading include:
- Traders can trade long and short positions
- There is instant order execution
- Trading CFDs involve low fees and commissions
- Users can use leverage when they trade CFDs
The disadvantages of contract for difference trading relate to the following:
- Traders can lose their entire investment
- Traders can easily overtrade because of the fast-paced nature of CFDs
- When retail traders keep their trading positions open overnight, they are subject to swap rates or overnight fees
- Traders are subject to margin requirement
- Leverage is risky and can lead to significant losses
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