What is the difference between CFDs and currency pairs trading?
Before you start trading, you need to be clear about the direction you want to take. For those who prefer aggressive forex trading CFDs are fine. Conservative traders prefer to trade currency pairs.
Contrary to the common opinion Forex market gives traders an opportunity to trade not only currency pairs but also a great variety of different instruments. These are precious metals, oil, stock indices and company stocks.
The possibility of trading these assets is provided by contracts for difference (CFD).
Here the trader must clearly understand that, despite the fact that all these instruments are included together with currency pairs in a single trading platform, they have different specifics.
The main difference between CFD and currency pairs
The main difference between CFDs and currency pairs is that CFDs are similar to futures. Trading in CFDs is also carried out using leverage, only if traders in currency pairs can use the ratio of 1:200, 1:500 or even 1:1000, in CFDs this ratio will rarely exceed 1:50, which is a completely different money management and profit calculation.
Secondly, trading CFDs and currency pairs differs in fundamental factors necessary for market analysis. In technical analysis, as we know, there are no differences between assets. Whether it is EUR/USD or Google Stocks, chart patterns or candlestick patterns will appear in the same way on the charts. And it is different in case of a fundamental analysis, where only a certain layer of statistical information will affect the dynamics of an instrument.
For example, if trader trades on the stock index Dow Jones or NASDAQ, he will first of all be interested in the national economic indicators, in this case the USA, to assess the prospects of each component of the overall index.
CFD on oil will depend on the supply and demand ratio in the market, decisions of OPEC, the dollar rate (with all the ensuing ramifications) and the performance of the world economy, as well as the main consumers of "black gold", primarily China.
Working with CFD on shares implies an in-depth study of the selected companies, their financial and economic situation and development plans.
Trading pairs on the forex market is certainly easier and clearer, because there is no need for an extended set of fundamental indicators and transactions can be made on the basis of the usual economic calendar.
The third difference between CFDs and currency pairs is the volatility of the instruments. It is believed that CFDs react more actively to fundamental changes. The issue of volatility is very important for speculative traders. The greater the amplitude of the movement, the more profit they can make. As far as CFDs are concerned, intraday forex strategies are popular among traders.
Finally, CFD trading is usually based on trading hours of stock exchanges, whereas forex trading is available 24 hours a day.
The similarity between CFDs and forex assets
Nevertheless, trading currency pairs and CFDs is very similar. Both are included in the same forex trading platform, are suitable for speculative trading, lend themselves to fundamental and technical analysis, have spreads and are margin trading instruments.
Which to choose: CFD or currency pairs?
To make a choice a trader should define his preferences to trading types and rationally estimate the equity of his deposit.
If he takes volatility bursts calmly enough, and the size of the deposit allows using smaller leverage, it will be advisable to work with CFDs. If the deposit is not large enough, then trading in currency pairs will be better suited.
CFDs will also suit traders working with shares of companies. However, when working with foreign securities, a possible language barrier should be taken into consideration, because news, reviews and analytics are published on English-language resources.
Nowadays traders can trade both in one terminal, but money management is very important. Using in trading both high-speed CFDs and smooth currency pairs, the trader makes trading versatile and does not depend on only one direction of fundamental analysis. If, for example, the stock market fails, trades on EUR/USD or GBP/JPY may help. But this approach requires a certain amount of experience and knowledge.