Forex And CFD Strategies For The Successful Investor
Exchanging stocks on the market is a lot more complicated than selling dollars and buying euros. Even though currencies play an essential role, they can be used in many ways to make a profit. Forex is one of the most popular approaches to date, but CFDs are also enjoying a rise in popularity. But what are they exactly? Are they similar or different?
Major companies such as Admiral Markets offer extensive Forex and CFD seminars that aim to educate traders on the intricacies of each asset, as well as how to determine the best strategies in each case. However, if a short introduction to the topic is what you are looking for, then keep on reading. Here is what you need to know to get you started.
Forex vs CFD: Similarities and Differences
Forex involves the process of selling another currency to buy another, and vice versa. Trades of this nature happen in a virtual place known as the market, but foreign exchange refers to a lot more than that. It is what makes the global economy function because it allows for business to be conducted between countries.
At a smaller scale, tourist exchanging their country’s currency for that of the land they are visiting are also engaging in forex. Due to this, there is no central market where the actions are conducted. In spite of its international character, transactions are international and over the counter, or OTC for short.
The same is true for contracts for difference, or CFDs as they are referred to by traders, investors and experts alike. When trading these, investors and brokers agree to exchange among themselves the difference between the value upon entry and exit of a certain position or asset. This happens in a decentralized market, making the transaction OTC as well.
Both FX and CFDs avoid the transfer of physical goods, and the trades are mediated by financial institutions. What is more, the same trading platforms are generally used for the two types of investments because the process is basically the same. But while many similarities exist, there are considerable differences as well.
First of all, CFDs offer a lot more flexibility due to the availability of different currencies and increment values. However, the forex market is open 24/5, while CFDs have a certain time frame during which they can be exchanged. This can be seen as a disadvantage because you need to possess extensive knowledge of the commodity or underlying market to determine these.
The prices of the two are also determined by different factors. The value of currencies fluctuates depending on fundamentals such as equities, liquidity, or the gross domestic product of a country. Although these are heavily influenced by sociopolitical context and major current events, prices fluctuate with a sense of measure.
The value of CFDs however depends on supply and demand ratios for the particular asset that is being traded. These are determined by the market itself and are subject to the passions and desires of market makers. Because people have fickle tastes that are easily changeable, CFDs are a lot trickier to handle as an investment. But if profit is made, it is a considerable one.
Successful Trading Strategies
Having the proper knowledge of what foreign exchanges and contracts for difference imply is the key towards success. The assets are traded in the same way, with brokers offering the same order options for both of them. Thus, you can place limits, stops and contingent orders on both FX and CFD assets, meaning that you can design your own system with ease.
In addition, even though the CFD market isn’t open 24/5 like the foreign exchange one, most brokers offer options in so many fields that round the clock trading becomes possible. For this reason, adopting a mixed approach and investing in both alternatives is a viable way to make a pretty penny on the trading floor.
According to Investopedia, CFD is profitable because it has more leverage. Margins start at 2% and can go as high as 20%. Lower margins mean that less capital is put at risk, which turns higher profits for investors. For this reason, CFD is something worth looking into despite its particularities that make trading more complicated.
Traditional currency exchange is also necessary because it is versatile. You can choose to enter short positions and scalp or day-trade for a quick win, or you can opt for long-term entries and ride entire trends out. And while you are waiting for stops to be reached, you can also have a go at contracts for difference.
The Bottom Line
Making money on the trading floor involves a lot of dedication. First, you need to acquire the proper knowledge so that all your decisions are swift and informed. When speaking of forex versus CFDs, it is not a matter of one being better than the other. In fact, the best approach is one that uses both so that larger profits come in on a daily basis.