The foreign exchange (forex) market is one of the most actively traded and liquid markets worldwide. In simple terms, the forex market is where currencies are traded. Currencies are traded in pairs, known as currency pairs, since this enables the value of one to be derived by directly comparing it against another.
The forex market is open for trade 24 hours a day, five and a half days a week, with currencies traded across almost every time zone.
Let us take a look at just some of the different ways you can trade forex, , so that when you take your place on the forex market, you can use the approach that best suits your trading style and forex trading strategies.
Contract for Difference (CFD)
A contract for difference (CFD) is a financial contract involving a trader and a broker, where the two parties agree to trade upon thedifference in price of an asset from the opening to the close of a particular trade. CFDs allow you to speculate on the price of a currency, without actually owning the asset, and will enable you to partake in short and long-term trades, buying or selling when you predict prices are likely to rise or fall. Due to this, CFD forex trading is a popular way to trade forex and stocks, for example, as they are highly liquid markets.
On top of this, CFD brokers will allow you to borrow money through the use of leverage to increase your exposure and help amplify any gains you might receive. Using leverage, you’ll only be required to provide a percentage of the total value of the trade, known as the margin. It’s important to remember that leverage can be a double-edged sword, since increased exposure can maximise potential losses as well as gains.
A futures contract is a legal agreement to buy or sell a particular security or asset at a predetermined price at a set time in the future – hence the name. The buyer of the contract agrees to take on the obligation to buy and receive the underlying asset when the futures contract expires, and the seller is obliged to provide and deliver the underlying asset at the specified date and time.
A futures contract allows you to speculate on the direction of a security, commodity or financial instrument, for either long or short trades, and with the use of leverage. They are commonly used to hedge the price movement of the underlying asset to help prevent losses from price changes.
What’s the difference?
CFDs and futures do have their similarities. They both allow traders to speculate on price movements on a variety of global markets, with the use of leverage. However, there are some important differences.
CFDs are often seen as being more flexible than trading futures, as you can trade on the prices of rising or falling markets without accepting the obligations of a futures contract.
Despite this, futures tend to have more price transparency, as they are traded on open, public exchanges. They are also bought and sold by a range of different investor types and institutions, creating a large and moderately liquid market. On top of this, for traders looking to trade in substantial volumes, futures contracts can often be seen as a more cost-effective way, due to the nature of the commission structure.
Despite this, trading CFDs is generally much more liquid than futures, meaning that requests are instant and you can get the payout you anticipated when you opened or closed your trade. What’s more, where futures have a set date and time for the trade to end, CFD’s do not, and will just keep going until you make a change or run out of money. This gives you even more potential to hedge your losses, keeping an eye on the external factors that could affect the currencies in which you are trading, and have more control over when you close your trade – potentially keeping losses to a minimum.
So, depending on the amount you are hoping to trade and your particular trading strategy, both approaches could be beneficial, but it is important to do your research and understand the many factors that could affect the ever-changing markets, before entering a trade.