There are two forms of Forex Trading; the Forex CFD Trading and the Spot Forex Trading.
Forex CFD Trading involves tradable contracts between CFD Forex brokers and Forex Traders, who are trading on the price difference of various currencies. It is very specific to trading currencies. There rest of the financial instruments are not included in CFD Forex trading.
On the other hand, the Spot Forex Trading involves physical exchange of currencies and delivery of the purchased currencies. This is different from the CFD Forex trading since the trader owns the currencies being traded, while in CFD Forex trading the trader does not own the currencies being traded. In CFD Forex Trading, the trader only takes advantage of the change in the exchange rates. However, in Spot Forex Trading, the trader exchanges real currency for another currency.
The spot forex contracts tend to take more time to mature than those of CFD forex trading. Normally, a spot forex trading contract will take an average of two days, while a CFD forex contract is instantaneous.
In this article, we are going to look at what Forex CFD Trading entails. We shall look into various topics like:
- Types of Forex CFD Trading markets.
- When are the different Forex CFD trading sessions around the world opened and closed?
- Types of Forex CFD brokers.
- Choosing the best Forex CFD Trading platform.
- Advantages of Forex CFD trading over spot forex trading.
- Disadvantages of Forex CFD Trading.
Forex CFD Trading Markets
A forex market is where the participants can speculate, sell and buy difference currencies. It is not a physical market place like the one where you go to by household goods. Rather, it is a global network comprising of banks (including central banks), commercial companies, Hedge Funds, investment management firms, Forex brokers as well as investors (traders).
There are two levels of Forex markets. The first level is the interbank market and the second level is the over-the-counter (OTC) market.
The interbank market is where banks exchange currencies for the purposes of adjusting balance sheets, hedging or trading on behalf of clients. It is therefore not for retail traders and the trades are very enormous.
On the other hand, over-the counter or commonly referred to as OTC market is where retail (individual) traders/investors can speculate buy and sell currencies over an online platform provided by a broker. Through the forex broker, the trader is able to access the bid and ask prices of the various currency pairs.
Forex trading sessions
The CFD Forex Trading is open 24 hours for five business days. However, the market can be divided into four major trading sessions depending on when investors from a certain region are more active. Actually, the forex market tends to be controlled by the market liquidity.
Therefore, although the CFD Forex market is said to be open for 24 hours, there are certain hours when some currencies are most traded since they are very active (it is the time when everyone is awake and trading and the exchange rates are changing very rapidly). This does not mean that the currencies will stop being traded for the rest of the hours. It will still remain open but there won’t be many activities around those currencies.
However, the beauty of it is that due to the geography of the earth, the there is always an active CFD forex trading session round the clock (for the entire 24 hours). Once one trading session closes, another trading session opens.
The four CFD Forex trading sessions are:
- Sydney session – It opens at 10:00pm and closes at 0:00 GMT
- Tokyo session – It opens at 00:00 and closes at 09:00 am GMT
- London session – It opens at 08:00 am and closes at 5:00 pm GMT
- New York session – It opens at 01:00 pm and closes at 10:00 pm GMT
These trading sessions are very important when it comes to choosing the currency pairs to trade at a certain time. You should choose a currency which falls under the geographical location corresponding to the open trading session at the time of the trade.
Types of Forex CFD Brokers
There are two main types of Forex CFD brokers;
- Dealing Desk brokers (DD)
- No Dealing Desk brokers (NDD)
The Dealing Desk brokers act as the market makers and they alter the market prices to meets their interest. However, due to the competitions among brokers, the rates are very close to the original market prices. When a trader places a trade using a DD forex broker, the trades goes to a dealing desk where the order is matched with other orders from other clients or passed to liquidity providers.
The No Dealing Desk brokers on the other side directly connect the trader to the liquidity providers (the interbank market) though through an online broker platform. Their market prices are more competitive compared to those of the DD brokers.
Then, depending on how the transactions are processed, an NDD broker can be further classified as a Straight Through Processing (STP) broker or an Electronic Communication Network (ECN) broker.
STP brokers have a range of liquidity providers and they normally compare the prices offered by the liquidity provider and display the prices offered by the best liquidity provider, though with a small addition to make up for the broker’s profit.
ECN brokers, however, allow their different liquidity providers to actively interact and the best price quotes carry the day. They provide transparent market information. They add commissions to trades so as to cater for their profits.
Best Forex CFD Trading Platform
Apart from looking at the type of broker, there are other features to look for in a CFD trading platform. These include:
- The ease of use of the user interface. You should look at what tools are available on the trading interface and how easy it is to locate and use them.
- The type of trading accounts offered. This will determine the number of trades you can carry out, the size of the trades, the minimum deposit in addition to other factors.
- The amount of leverage the broker offers. Normally, DD brokers offer larger leverages compared to NDD brokers. Although larger leverages are good, they are double edged; it will be your advantage when making profits and your disadvantage when making losses.
- The available options for depositing and withdrawing funds.
Advantages of Forex CFD trading over spot forex trading
- In Forex CFD trading, the trader does not own the currencies being traded like in spot forex trading; the trader only trades on the change of the exchange rates between the currencies.
- Forex CFD trading allows traders to trade currencies on margin thus enhancing the risk/return ration of your investment capital. When trading forex using CFDs, you use a small amount of your money (margin) which covers the potential loss of the position.
- In Forex CFD trading, traders have the freedom of hedging positions contrary to forex spot trading where ones you open a contract it is final.
Disadvantages of Forex CFD trading
- Due to margin trading, traders at times over-leverage trades, which is deciding to risk too much on one trade.