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Forex and CFD trading are often mentioned in the same breath. And for a good reason because many brokers let you trade both, and they have a few things in common. However, they’re not the same.
Forex is a global marketplace where currencies are bought and sold. On the other hand, CFDs (Contracts for Difference) are financial derivatives that let you speculate on price movements of assets like Forex pairs, stocks, and commodities.
So, what sets them apart? And which one is right for you? Let’s break it all down so you can trade smarter.
What is Forex Trading?
So, how does Forex trading work? Forex (commonly referred to as FX) stands for foreign exchange and is a global financial market where the trading of currencies occurs. Here, traders profit off the price difference they predict between a currency pair, such as EUR/USD or USD/JPY.
The place where this takes place is called the forex market, which just so happens to be the world’s largest and most liquid financial market. According to the 2022 Triennial Central Bank survey of FX and OTC derivative markets, Forex has a daily trading volume of approximately $7.5 trillion.
Currencies are always traded in pairs because, to make a profit, you must simultaneously buy one currency and sell another. For example, if you expect the Euro to rise in value against the Dollar, you’d buy EUR/USD. When your predictions turn out to be right and the Euro does indeed increase in value, you can sell it for a profit. On the other hand, if it weakens in comparison to the American Dollar, you bear the losses.
In a nutshell, you buy a currency pair at a low price, expecting one to rise in value against the other, and then sell it for a profit.
The forex market does not need to move unilaterally for traders to make a profit. Forex traders can also sell first and buy later (short selling) to profit from declining prices, making it more flexible than just a simple “buy low, sell high.”
There’s also the concept of leverage within forex. Brokers and platforms allow traders to control a large position in the market by borrowing funds from them. However, this increases risk as well as potential profit, so you’d have to trade wisely.
What is CFD Trading?
CFD trading is pretty unique in the sense that it works via speculation, not ownership. Meaning, you speculate on the price movements of assets and profit from the difference. These assets include stocks, commodities, and forex pairs. Since there’s no ownership involved, you make a contract with a broker and trade based on price changes. Your profits and losses are determined by the difference between the price when you enter a trade and when you close/exit it.
The concept of leverage exists within CFDs too, and it allows you to control a large position with a small deposit (margin). Again, it has potential for massive gains and simultaneously big losses.
CFD trading came about in the early 1990s in London as a way for institutional traders to hedge stock market exposure and became public in the late 1990s to early 2000s. So, as of 2025, it is around 30–35 years old. Almost three decades later, it has seen a major spike in popularity among modern traders looking for an alternative to the restrictive and slow methods of traditional trading.
Similar to forex, the concept of short-selling exists here too, but there’s no need to borrow, as profits can be made regardless of market direction.
To understand all this better, let’s say you believe the Tesla stock will rise, so you buy a CFD at $200 per share. If Tesla’s price jumps to $210, you close the trade and make $10 per share (excluding fees).
But if the price drops to $190, you take a $10 loss per share. In this scenario, had you expected the price drop, you could have shorted the Tesla stock instead and made a profit by selling high and buying low later on.
Forex vs. CFD Trading: What’s the Difference?
At first glance, Forex and CFD trading might seem very similar, and they do share some common ground. However, they are still quite different. Think of it like this: Apples and potatoes are both plant-based and edible, but that doesn’t make them the same. The same goes for Forex and CFDs. Here are the key differences:
1. Forex is a Market, CFDs are a Type of Trade
The biggest difference is that Forex is a financial market where people trade currencies, while CFDs are a type of trade that lets you speculate on the price of different assets like stocks, gold, oil, and even forex itself. Forex is the asset being traded, while CFDs are a method of trading that can be applied to multiple markets.
2. Tradable Assets
Forex trading, as the name suggests, limits you to trading only currency pairs, such as EUR/USD or GBP/JPY. In contrast, CFD trading covers a wide range of assets, including stocks, indices, commodities, cryptocurrencies, and forex pairs. If you want to trade Tesla, gold, or the S&P 500, you’d need CFDs, as Forex only deals with currency exchange.
3. Trading Hours
The forex market is open 24 hours a day, five days a week, from Monday morning in Sydney to Friday evening in New York. You can jump in anytime you like.
The trading hours for CFDs, though, depend largely on the specific asset. Stocks only trade during stock market hours (For example, Tesla trades when the US market is open), while some commodities and cryptos trade 24/7. So, the market for CFDs is arguably more active, though the schedule is certainly more structured with Forex.
4. Liquidity
For newcomers, liquidity simply refers to how easy it is to trade. As discussed before, Forex is the biggest market in the world, active 24/5. It’s fast, and there’s always someone to buy and sell from.
With CFDs? It depends. There are always buyers and sellers for gold or, say, Apple stocks, which makes entering and exiting a position easy. However, smaller, more niche or exotic assets might have a lower trading volume. This results in price movements being far less predictable and sometimes stagnant.
5. Costs & Fees
With Forex, the main charge you bear comes from spreads, which is the small price difference between buying and selling. Brokers usually don’t charge extra commissions, but some might, especially for ECN accounts.
Similarly, costs vary by broker when trading CFDs. Some use spreads, while others charge commissions and an overnight fee for keeping a trade open. This overnight fee is similar to interest, as holding a CFD trade overnight involves borrowing money from the broker due to leveraged trading.
Benefits of Forex and CFD Trading
Both forex and CFD trading have their set of advantages, making them appeal to different types of traders. Let’s take a look at their benefits individually:
Benefits of Forex
What makes Forex appealing is the fact that it is the largest market, and it doesn’t sleep throughout the week. You can choose to enter or exit anytime during active hours, and being the most liquid market in the world, you’re never stuck waiting for a buyer or seller.
Moreover, since most brokers make money off the spread, there aren’t any outrageous commission fees to deal with.
NOTE: While many forex brokers make money purely off the spread, some do charge commissions, especially for ECN accounts.
The concept of leverage is another major advantage. It lets you trade bigger positions with less money, but there’s two sides to the coin, which means big wins can turn into big losses. As a cherry on top, the market is two-way, so you can make money whether prices go up or down.
Benefits of CFD Trading
CFDs allow you to trade various assets, including forex, stocks, crypto, and indices. This freedom to trade in multiple markets is extremely convenient.
Similar to forex, the concept of leverage stands strong. It lets you trade big without having to invest heavily at first. However, the deposit amount does vary depending on the asset. Since CFD trading is based on price speculation, there’s no ownership involved. This means no storage issues for commodities like gold, no need to handle stock dividends, and even no stamp duty.
Moreover, short selling is extremely easy and does not require borrowing shares, as is the case with traditional stock trading. This makes it easier to make profits and stay active in bearish markets. Additionally, since only a fraction of the amount is required to start trading (while still allowing you to trade big), you can take a position in expensive assets without the need to buy them first. This massively reduces the barrier for entry.
Risks of Forex and CFD Trading
Where there is potential for massive gains, risk always lurks around the corner. That’s why it is not wise to trade emotionally or out of hearsay, but rather to educate yourself thoroughly about Forex and CFD trading and make calculated decisions.
The biggest contributor to risk and profits is leverage, and it's shared by both. Leverage can translate to multiplied profits, but your losses can be equally steep if prices move against you. To manage this, it’s best to use it conservatively and protect your positions using features like stop-loss orders. A golden rule that traders follow is the 2% Rule, which means you never put more than 2% of your money on the line.
Another risky element between the two is market volatility. The fast-paced nature of the market might make FX and CFD trading really appealing, but it can sometimes be a struggle to keep track of what’s happening around.
Factors like economic news, geopolitical events, shifts in market sentiment, or even hype can result in sudden swings in prices. This volatility can lead to unpredictable price movements, and in some cases, markets may become stagnant or "choppy," making it harder to execute trades at the desired price.
With CFDs, the level of liquidity can vary widely depending on the asset, which adds another layer of complexity to managing your trades.
Trading Forex and CFDs with XBTFX
Having a reliable broker is extremely crucial before you start trading, but your search for it doesn’t have to be long. Instead, give XBTFX a shot. Over 50,000 traders trust our platform to carry out different types of trades, including Forex and CFDs. Here’s how we make things easy:
- Direct access to the world's most liquid market along with over 10,000 markets to trade CFDs.
- An active trading community with access to professional trading strategies. Professionals can share their successful strategies for a commission.
- Transparent pricing and a clear structure, with tight spreads and low fees.
- Access to platforms like MetaTrader 5, cTrader, WebTerminal MT5, Copy Trading, PAMM, and MAM.
- All services and products are registered and/or regulated in various jurisdictions, ensuring the safety of funds and services.
- Plenty of educational material to assist upcoming traders, along with an economic calendar.
- Various account types, including ECN, Standard, as well as Islamic accounts that comply with the Sharia law.
- Demo account for practice and up to 500:1 leverage.
It doesn’t matter if you’re an experienced trader or just starting to get your feet wet, XBTFX is suitable for all types of traders. Oh, and our support team is available for a chat 24/7, even when the rest of the world is sleeping. Sign up and start trading in minutes.
Closing Thoughts
Both FX and CFD trading are great options if you want to tap into a fast-paced market. The way to achieve desirable results, potentially from the get-go, is to have a well-developed strategy that’s backed up by actual market research. Also, it’s important to enter with a rational mind so you can make logical decisions, as opposed to emotional trading that almost never turns out to be in favor.
FAQs
Why is CFD trading illegal in the US?
The reason CFD trading is banned in the United States is because of the strict regulations imposed upon it by regulatory bodies like the SEC (Securities and Exchange Commission) and CFTC (Commodity Futures Trading Commission). They deem it too risky for the average trader due to its highly volatile market and the option for high leverage, which naturally comes with the potential for big losses.
Is Binance a CFD?
Binance is not a CFD but the biggest cryptocurrency exchange that allows traders to trade cryptocurrency like Bitcoin, Ethereum, and more. It also has options for futures and leveraged tokens.
Do professional traders use CFDs?
Absolutely, traders of all levels of expertise dabble in CFDs due to the immense potential for profits. It’s the preferred trading instrument of many traders for short-term speculation, hedging, and gaining exposure to various markets without the hassle of ownership. However, what makes professionals get the title of professional is their discipline and use of risk management strategies religiously.
Is MT4 a CFD?
The short answer is no. MT4, which stands for MetaTrader 4, is a trading platform that allows traders to execute their trades, including CFDs. It isn’t a trading instrument like CFDs.
