Monday Jun 26 2023 10:13
7 min
If you want to trade forex, then CFD forex vs. spot trading is a decision you’ll need to make. Which one is best for you will be down to your own appetite for risk, as well as your trading goals.
Both CFDs and spot trades are a way of trading the foreign exchange (forex) market, where traders seek to profit from changes in exchange rates between currencies.
All forex trades are done as part of a ‘pair’, which means you are always trading one currency against another.
Common pairs include:
But there are a lot of different pairs available to trade.
The first currency in the pair is known as the base currency, with the second currency known as the quote currency.
In a forex trade, you’re always trading the price of the base against the quote.
So, in a GBP/USD pair, you’re trading the price of the US dollar against the UK pound sterling.
In GBP/EUR, you’re trading the price of UK sterling against the Euro, and so on.
By placing a spot trade, you simply buy and sell your chosen currencies at their current price, in cash.
Then, if the price moves in your favour, you can profit from it.
If you have enough capital to make this kind of trade, forex spot trades can be an effective way to trade the markets.
CFD stands for ‘Contract for Difference’. This means that you and a broker agree to exchange the difference (hence the name) between the price of a forex pair when the contract opens, and the price when it closes.
When you trade CFDs, you don’t actually buy the currencies. You simply speculate on the price movement, and don’t ever own either currency in the pair.
The price of the CFD pair should roughly correlate with the real price pair, though there may be a slight difference depending on market conditions at the time.
So, why would you choose forex CFDs over simply buying and selling the currency for real?
There are a few things to consider here:
Whatever option you choose to use, the two most important things you need to consider are: