CFD trading and Forex trading are both associated with high leverage. Leverage is the use of borrowed capital to increase exposure and/or potential gains from trade. At first glance, there seems to be little difference between the two in this regard; but that’s not entirely so.
Basic explanation
As opposed to stocks or commodities, Forex trades can only end in one way — profit or loss — because cryptocurrencies do not pay dividends or interest (though it is possible to take on debt by borrowing bitcoins). This means that CFD traders who are wrong have an opportunity to exit their position without ever losing money.
Wrong forex traders lose money, and they lose it immediately! Some Forex brokers charge interest on leveraged positions held overnight before liquidating positions, but the rates are often prohibitively high (30% APR is not uncommon).
Prospects
When you hold a long bitcoin position overnight with leverage, there are no compounding interest charges to pay. At worst, you’ll buy back in at a slightly lower price and suffer a loss — possibly from exchange fees as well. However, if the market moves higher, or your position remains profitable by exiting early… you can leave it alone and watch the profits accumulate!
The CFD approach lends itself to more conservative trading. In contrast, Forex traders must be willing to risk losing everything to realize gains beyond what even margin calls might justify. The question of whether one approach trumps another when deciding which leveraged instrument suits you better come down to a matter of individual risk tolerance.
Difference
CFD trading is based on leverage that is more readily available (for example, the ability to borrow up to 1:30 with BitMEX) and works as long as prices don’t fall below the deposit amount. In this case, you may not cover your losses, and your broker will keep all deposited money. On the other hand, Forex is based on margin, which makes it possible to lose more than originally invested. Also, there are no set rules for margin increases or decreases, creating additional uncertainty when trading forex according to its nature.
Generally speaking, CFD traders tend to have lower trading costs because they do not have to deal with brokerage fees per trade or exchange fees. On the other hand, forex traders have to deal with these fees, and the number of costs is much greater.
Future goals
If your goal is long-term wealth accumulation, then leverage presents an interesting opportunity for multiplying gains and losses depending on how you play it. Ultimately, its greatest advantage may be that it allows you to diversify across multiple assets by effectively investing the same amount of capital many times over — something which could never be done using leveraged forex instruments. You can do this with the assistance of brokers like cm trading.
All things considered, CFD trading seems like a better way for average investors to trade cryptocurrencies due to its lower entry threshold, more transparent risk-reward ratio, and greater availability of free platforms with high leverage.
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