Forex CFDs versus forex spot trading

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Forex CFDs versus Forex Spot Trading

• Presented by The Forex Secret

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Are there any differences between forex spot
trading and trading forex on a CFD account?

• Essentially there are two ways to trade forex
  using CFDs or margin forex.
• Many CFD brokers are promoting themselves to be
  Forex brokers these days, which they have always
  offered but is there any edge in using them
  versus a normal Forex broker who specializes in
  that field?
• Trading Forex on a CFD account is similar to
  trading traditional Forex, ie. you would buy or
  sell a set value of currency, eg, 10,000 USD.

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Spot Forex

• A spot forex trade involves either buying or
  selling a forex pair at a current rate.
• This involves a direct exchange between to
  currencies. Such transactions involve cash as
  opposed to a contracts and interest is not
  included upon the agreed transaction.
• Should you wish to keep the position open or
  rollover you must enter into a swap transaction
  involving your forex pair.

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Forex CFDs

• A CFD replicates the movements of an asset like
  futures or shares.
• Thus, for instance if it is based on the EURUSD,
  then the spot EURUSD is the underlying of that
  specific CFD. CFDs are not traded on common
  exchanges, as opposed to their underlyings and
  are exclusively traded over-the-counter.

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Forex CFDs

• Rolling Spot Forex is not a regulated investment
  in the United Kingdom, nor the USA.
• The USA only has a so-called NFA to charge fees
  if a market maker offer spot forex and in the
  United Kingdom, it is in line with BoEs
  Non-investment Products code.

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Forex CFDs

• Thus, the only superficial technical difference
  is that when you are trading with a provider on a
  Forex CFD, you will not be buying the actual
  currency.
• You will be trading on the providers prices.
• A problem with CFDs is that they almost never
  have exactly the same identical prices or the
  same spreads in their underlyings.

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Forex CFDs

• Your CFD provider acts as the counter-party and
  sole market maker in all your trades, so in
  absence of inhouse hedging mechanisms you can end
  in a situation where when you win, the provider
  will lose, whilst when the provider wins, you
  will lose.
• CFD providers are sometimes criticised for
  setting arbitrary spreads or suspending trading
  in crucial moments.

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Forex CFDs

• Perhaps more significantly is that forex based
  CFDs will be based on the cash market but it will
  be more trusted if the provider tells you that
  they use CMEs currency futures or Tier 1 Banks
  prices and liquidity for hedging.

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