You’re ready to start trading or exploring the financial markets. Everywhere you look, you hear about CFDs and Forex trading. These terms show up all the time. But now you’re stuck, unsure where to begin or what they even mean.
Which one is better? Which one is right for you?
You may already be trading Forex and considering switching to CFDs, but you're unsure if it's the right move.
To help you decide, we’re breaking down CFD vs. Forex, the differences, the similarities, and what matters. Because the truth is, there’s no one-size-fits-all answer. The best choice depends on you, your goals, your trading style, your strategy, and your budget.
Here’s a quick overview:
- CFD is a trading method that allows you to speculate on the price movements of a wide range of assets, including Forex.
- Forex, on the other hand, is specifically about trading currency pairs.
So first, let’s break down what CFD and Forex trading are. Then we’ll compare the two and share a bonus tip, including whether you can trade Forex as a CFD.
Let’s dive in.
Understanding Forex and CFD Trading
In simple terms, Forex is all about trading currencies. Also, one of the oldest and most established markets.
CFDs, on the other hand, let you trade a broader range of markets. CFDs are a newer, more flexible trade method built for modern traders.
When you trade forex, you buy one currency while selling another, aiming to profit from price changes.
With CFDs, you're trading the price movement of an asset without actually owning it. This could be anything from currencies to stocks, gold, oil, crypto, etc.
Let’s break these two down further to help you understand them better.
What is CFD Trading?
CFDs started in London in the early 1990s. A Contract for Difference (CFD) is a financial contract between a trader and a broker to swap an asset’s price difference from when the trade opens to when it closes. Traders don’t own the asset; they speculate on whether the price will increase or decrease.
CFD trading lets you trade with leverage, meaning you can control a bigger trade with less money. With CFDs, you can trade price movements on all kinds of markets, like company stocks, gold, oil, Forex, crypto, and more. Today, over 12,000 CFD instruments are available globally.
This trading method suits traders who want to diversify their portfolios by trading various assets. This method also caters to traders who wish to short-sell without possessing the underlying asset.
What is Forex Trading?
The forex market is the world's oldest and most significant financial market, with over $6.6 trillion in trading volume every day. Forex trading means exchanging one currency for another by speculating on its price movement. With the right speculation, traders make a profit from forex trading; otherwise, they lose.
Simply put, a forex trading strategy is all about buying and selling currencies like EUR/USD or GBP/JPY to profit from their price changes.
But no physical money is exchanged. All the activity happens online through global networks. The major trading hubs include Tokyo, London, New York, Hong Kong, and more.
However, Forex is perfect for traders who love working with currency pairs and want that traditional trading style.
Differences Between CFD vs. Forex
The key difference between forex trading and CFD trading is that forex trading is limited to just currencies, while CFD contracts cover a broader range of assets, including Forex.
Forex is one of the many assets you can trade using CFDs. CFDs are a trading method, not a market. They let you trade on the price movements of different asset classes without owning them, and Forex is just one of those classes.
So, forex trading can be done through CFDs, meaning you're not buying real currency.
There are more differences in their underlying assets, trading methods, and risk profiles. Let's take a detailed look to help you better understand CFDs and Forex.
Range of Assets
The core difference between CFDs and Forex is that Forex is an asset itself and is limited to currencies only, while CFDs cover many assets. With CFDs, traders get exposure to various trading opportunities, including Forex.
Forex has eight major currencies, but many brokers offer 40–70 currencies. This range includes majors, minors, and exotics. Some of the most commonly used currency pairs are,
- EUR/USD
- GBP/USD
- AUD/USD
- USD/JPY
- USD/CNY
- NZD/USD
- USD/CAD
- USD/CHF
And the common CFD assets are,
- Commodities
- Indices
- Stocks
- Currencies
- Cryptocurrency
Factors Influencing the Market
Forex prices often move based on big decisions made by governments. Things like job changes, interest rates, or how confident people feel about the economy can all impact a country’s currency. If a country’s economy looks strong, its currency is stronger, too.
CFD prices depend on the supply and demand of the asset they are based on. Therefore, the price of a forex CFD will fluctuate like that of the actual forex market. This means the influential factors will be based on the same news, events, and economic factors.
Trading Structure
CFDs are financial derivatives. This means you are trading a contract with a broker based on the price movement of an asset. However, you are not selling the asset itself. You can go long if you think the price will rise. If you believe the price will drop, you can also go short. Also, CFD trading is flexible and works well for different strategies. There is day trading, swing trading, or even long-term investment.
Forex trading, on the other hand, involves trading directly between two parties. You are buying one currency and selling another at the same time. Traders use it often for carry trading.
A broker is still involved in most retail trading. However, Forex is more popular for short-term strategies because of its high liquidity and volatility.
Trading Hours
CFD and forex trading hours aren’t the same. They depend on what you are trading.
Forex markets are open 24 hours daily, from Monday to Friday. You can trade any day of the week, no matter where you are. This flexibility lets you fix your pace and schedule.
CFD is a bit different. Most CFDs follow the hours of the fundamental markets they are based on. For example, if you are trading US stock CFDs, you can trade from 9:30 am to 4:00 pm (US time). UK stock CFDs follow the London market hours.
Some CFDs, such as Forex, commodities, or crypto, often open longer, even 24/7.
Therefore, it is essential to always verify the exact trading hours with your broker for the specific type of trade you are executing.
Cost of Trading
You will always come across the term "spread" when you trade CFDs or Forex. This is the difference between the buying and selling price. For forex CFDs, the spread is the only cost.
However, with CFDs, there can be a few extra costs depending on what you are trading. There can be a commission or withdrawal fee. Some brokers can charge you a fee for holding the CFD position overnight. These are called overnight fees or swap rates.
However, these costs can vary depending on market conditions and which broker you deal with. Some brokers, such as FNmarkets, offer $0 withdrawal fees.
Size of Traded Contracts
In forex trading, the standard lot size is 100,000 units of the base currency. If the number sounds like a lot, do not worry. Brokers provide leverage that allows you to trade much smaller amounts. Also, you can start mini lots (10,000 units), micro lots (1,000 units), or even nano lots (just 100 units). This way, beginners or small-budget traders can enter the market without a giant investment.
CFD contract sizes work a bit differently. If you are trading share CFDs, one contract equals one share. But with commodities like metals, one contract equals 100 ounces. So, when selling a silver CFD, one contract will represent 100 ounces of silver.
Regulation
CFDs are more strictly regulated than Forex because there are higher risks. Some countries, like the US, Brazil, and Belgium, have strict rules on CFDs, such as limiting leverage or even banning certain products. These regulations are to protect traders from significant losses.
In contrast, forex trading is less restricted in most countries. Since it involves actual currency exchange, it's considered less risky than CFDs. However, this doesn't mean it's unregulated; rules, regulations, and licenses are still involved.
Similarities Between CFD vs. Forex
Despite several differences, CFD and Forex share some similarities, such as the ability to trade in the short term and their similar execution processes. CFD and forex markets let you trade by speculating on price movements without owning the tangible asset.
Let’s have a look at the similarities.
Non-ownership of the Underlying Asset
Whether you are trading CFDs or Forex, you are not buying the tangible asset. Instead, you are selling a contract based on how the price moves. The contract can be for anything: stocks, indices, crypto, or currencies. You need to speculate whether the price will go up or down.
In Forex, it’s the same. You are trading one currency against another. But you do not own the currencies. You are predicting which one will get stronger and which one will weaken.
Trade Both Long and Short
Both forex and CFD trading give you the flexibility to go long or short. This advantage means you can profit whether the market moves up or down. Going long means you're buying because you expect the price to rise. Going short means you're selling because you believe the price will drop.
Going long or short also means holding duration, which is how long you keep a trade open. You can trade short-term (for minutes, hours, or days) or long-term (for weeks, months, or even longer). Both forex and CFD trading support all styles.
Liquidity
CFDs and Forex offer high liquidity, which means you can easily enter and exit trades. But this depends on what you're trading. If the asset behind a CFD isn’t traded much (like a rare stock), then the CFD itself may become harder to trade.
The same goes for Forex. Popular currency pairs like EUR/USD or GBP/USD are very liquid, so trades happen fast. But if you’re trading less common pairs, you may notice that buying or selling quickly is harder.
Risk
The risk associated with Forex and CFD trading is nearly identical because neither involves purchasing the actual asset, and both utilize leverage. With leverage, you can profit more from the potential risk of losing.
Prices in these markets move fast. If any market change or anything significant happens, such as global events, this means there is a chance your speculation might go wrong.
Similar Trade Execution Process
CFD and forex trading work similarly when it comes to executing trades. Whether the market is going up (bullish) or down (bearish), you can use the same price action strategies to enter or exit trades.
Both are traded over the counter (OTC). This means you're not selling on a traditional exchange. You can trade them on the same platform using charts, tools, and pricing strategies.
Which One Should You Choose?
Understanding how CFDs and Forex are similar in some aspects and how they differ will help you decide which one to choose. Honestly, there is no clear “winner” here. It depends on your experience, knowledge, goals, and, most importantly, what kind of trader you want to be.
If you're interested in tracking global economic trends and want to invest in a smaller set of currencies with the help of leverage, forex trading is the right choice for you.
But if you’d rather diversify and trade different things, like stocks, commodities, or indices, all from one account, then CFDs could be a better choice. They give you more variety, flexibility, and the chance to make bigger trades even with less capital.
Can You Trade Both? Trading Forex CFDs
Yes, you can trade Forex using CFDs! You're trading currency pairs, like EUR/USD or GBP/JPY, through a Contract for Difference (CFD). You are not buying or owning the currencies. Instead, you're just speculating on the price movements.
Forex CFDs combine two things: the forex market, known for its rapid price moves. Next is the CFD model, which gives you flexibility. These contracts let you trade with leverage to control bigger positions with less money. But remember, while this can increase profits, it can also increase losses.
The best part? You can go long (buy) if you think one currency will strengthen or short (sell) if you believe it’ll weaken, without ever having to own the currencies.
So, in short: Yes, you can trade Forex and CFDs together. Forex CFDs allow you to tap into the currency market using the CFD approach.
Conclusion
CFD and forex trading have advantages and potential risks. Where CFDs offer exposure to a wide range of assets, Forex is limited to currencies. However, both markets provide leverage and allow for taking long or short positions.
We have explained the similarities and differences between CFDs and Forex to help you better understand them. So, now it's time to decide which is suitable for you to make a profit.
FAQ
Are CFDs Better Than Forex?
It depends on your goal. CFDs offer more variety (stocks, crypto, gold, etc.), while Forex is focused only on currencies. If you want to trade multiple markets, CFDs are better. If you're only into currency pairs, Forex is your go-to.
Does Forex Use CFD?
Yes, most retail Forex trading is done via CFDs. You're not buying actual currencies but trading contracts based on their price movement.
