What is CFD in Forex – CFD Meaning

by Aug 20, 2020What Is Forex

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What is CFD Meaning

CFD means Contract For Difference and in Forex is used to trade currencies. It is contract between two or more parties where you as a trader can sell or buy currency pair based on your analysis.

You will find explanation that contract between two parties is derivative which is used to speculate on the future price movement of the asset which they have made an agreement on.

When they make an agreement it is set a date at which that agreement will expire. When the date expires the contract will be terminated with results. You will make money or you will lose money depends on the status of the trade at the moment of closing of a trade.

If you are in plus while the trade is open you will end up with profit. If your trade is in minus when the trade is closed you will end up with loss.

What is CFD in Forex

CFD in Forex means that you will make a contract with your broker. You will buy or sell one currency pair with prediction that the price will move in your favor.

If you make correct decision you will make money. If you make wrong decision you will lose money.

The difference between CFD in Forex and usual CFD where is the date at which the contract will expire is that in Forex there is no date.

In Forex CFD trading is set without end date. That means you can have trade open(contract) as long as you wish.

When you want to close trade you can do it on the trading platform.

CFD in Forex does not allow you to buy or sell physical currency pair. You buy or sell a number of units for a particular instrument. Buy or sell depends on you and your trading decision will the price rise or fall.

Difference Between Standard CFD and Forex

The difference between CFD trading and Forex trading is that CFD trading involves different types of contracts covering a diverse set of markets, such as indices, energy, and metals, whereas Forex offers currency trading.

When you are trading CFDs on Forex, you do not actually own any currencies. The contract tells you that you bought some at specific price.

When you enter a Forex trade, it is up to you to decide when you want to close it. If you are trading on margin, the only time it will be closed without your permission if the required margin limit is spent.

With CFD trades, you are given a specific deadline. If you place a trade today, the broker will tell you that it will be active for few days, after which it will be closed whether you are in wining or losing position.

Before that deadline it is up to you to decide if you want to extend the trade, or close it and take the profit.

In most cases, CFD trading is done because of the high leverage. In the past it was common to get leverage as high as 1:1000, but now most EU-based brokers give a maximum of 1:30 because of regulations.

You can get 1:1000 leverage on Forex trades with some FX brokers easily, even within the EU if you can prove you have experience in trading.

CFD Costs in Forex

When trading CFD in Forex you must pay the spread. Spread is difference between the buy and sell price.  

Pip spread calculation

Image above shows how the spread is shown on the chart.

As you can see there is ASK and BID price. When you want to buy CFD in Forex you will pay ASK price. If you buy at the price from the chart you will pay the price 1.30760.

From the start you will be in minus for the spread and that is 7 pips. That is the cost you have to pay on each trade you open.

If you want to sell currency pair you will get the BID price. If you sell at the price from the chart you will pay the price 1.30690.

Same amount will be payed to the broker. It will be 7 pips. Whenever you open a trade, whether buy or sell, you will be in minus at the start. 

For you it is the best to find broker that will give you smallest spread. That way you will lose less money on each trade you open.

Conclusion

While CFD and Forex are similar there are slight differences. The main difference is that CFD in Forex does not have expiring date on open order.

Trading CFDs on Forex is same as trading currency pairs so you should not have any problems.

If you want to learn more about other combinations of currency pairs check the article about what is XAU in Forex.

Frano Grgić

Frano Grgić

A Forex trader since 2009. I like to share my knowledge and I like to analyze the markets. My goal is to have a website which will be the first choice for traders and beginners.

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