01
⇄
What's the Difference Between Forex and CFDs?
Forex is one of the many financial markets available to trade.
When trading forex, you speculate on the value of one currency
against another, such as the euro against the US dollar
(EUR/USD).
CFDs, or contracts for difference, are a derivative product that
can provide exposure to forex price movements. When trading
forex CFDs, you do not take ownership of physical currencies.
Instead, you speculate on whether the price of a currency pair
will rise or fall.
02
€
Forex Is Traded in Currency Pairs
Forex is always traded in pairs, such as EUR/USD. One currency
is bought while the other is sold, depending on which currency
you believe will appreciate in value.
The currency on the left is known as the base currency, while
the currency on the right is the quote currency. If EUR/USD is
trading at 1.35000, this means that it costs 1.35 US dollars to
buy one euro.
Currency pairs are traded in lots, which standardise the size
of forex transactions. A standard lot typically represents
100,000 units of the base currency, while a micro lot represents
1,000 units.
03
$
Forex CFDs Trade in the Quote Currency
Forex CFDs are generally traded on the spot market, based on
the current cash price of a currency pair rather than a future
price.
When trading a forex CFD, the trade is generally denominated in
the quote currency. For example, when trading EUR/USD, the
quote currency is the US dollar.
Traders can access major currency pairs such as EUR/USD and
GBP/USD, minor pairs such as GBP/CAD and exotic pairs such as
EUR/MXN.
04
◷
Spot Forex vs Forex Options
Most spot forex CFD trading is based on the current cash price
of a currency pair and is traded in real time. Forex options
provide another way to gain exposure to currency markets.
An option gives the holder the right, but not the obligation,
to buy or sell a currency pair before a predetermined expiry
date.
Spot Forex
No expiry date, but overnight funding charges may apply
when positions remain open.
Forex Options
Have a defined expiry date and may not incur the same
overnight funding structure as spot positions.
05
↗
Spot Forex CFDs Are Traded in Contracts
When trading spot forex CFDs, positions are opened using
contracts. The potential profit or loss from a trade is
determined by the size of the position and the movement in the
currency pair.
In general terms, the profit or loss can be calculated by
multiplying the number of contracts by the value of each
contract and then multiplying the result by the difference in
points between the opening and closing prices.
Position Size
×
Contract Value
×
Price Movement
=
Potential P/L
