CFD or Contract for Difference trading allows a trader to trade on underlying assets [indices, commodities, equities, and government bonds] price movements. Foreign Exchange or Forex trading involves buying and selling of currency pairs. Both CFD trading and FX trading have similarities and dissimilarities.
Similarities of CFDs & FX
- The trade execution process is the same.
- The market can be easily entered or exited in rising and declining market conditions.
- Both CFDs and FX trades get executed from the same platform using the same charts & pricing method.
- FX and CFDs is an OTC market that is operated electronically without any physical location or exchange within a set-up of banks.
- The trading cost in both is the spread in comparison to other trading instruments that include a commission as fees.
- The trader does not need to hold physical ownership of the instrument. For example, if you buy AUS/USD, it means you are not purchasing the Australian dollar and selling the American dollar but speculating on the exchange rate.
Dissimilarities of CFDs & FX
- CFD involves different contract types covering diverse assets like energy, metal, and indices. FX offers only currency trading.
- In CFDs, you get a chance to choose different contracts with varying currency types and intrinsic value depending on the country of the underlying asset. FX trading involves one currency trading against another currency. The trading involves uniform lot sizes.
- CFD market is driven by the supply & demand of specific commodities or the trend alterations connected with the industry. FX trading is influenced by global events including foreign political changes or large employment shifts.
On ADSS, you can learn more about trading CFDs and FX. You can even choose CFD Bitcoin trading on ADSS that offers access to essential tools. Below are some helpful CFD trading tips.
- Use stop-loss – Ensure that you don’t limit yourself in using stop-loss orders.
- Practice on the demo account first – Start your CFD trade by opening a free demo account to practice. You can test your strategies before jumping in risking real dollars.
- Research – Get familiar with your trading-related terms, risk management, and money management. Never enter CFD trades before understanding the difference between EUR/USD and USD/EUR quote. Choose a few specialisms and concentrate on them rather than handling all asset classes.
- Limit leverage use – Usually, the leverage offered is high. It is tempting to earn a lot more than you invest, but if the price does not move in your predicted direction then the losses are significant than what you originally invested. For example, if you were offered 400: 1 leverage to open a position, the profits can be 400 times more than your invested capital, but if the prediction is wrong the losses will be 400 times more than what you invested.
- Use correct trade position – If the broker does not allow lowering the leverage then reduce the trade position. You need to be familiar with your potential risk level.
- Set a trading strategy – Before you open a position, set a trading strategy. It defines when to close in a worst and profitable scenario.
- Stay committed to your strategy – Never run after losses because emotions to win them back can make you lose even more. Set a trading plan and stay committed to it.