There are two main ways to trade forex - through spot trading or using contracts for difference (CFDs). With spot trading, the trader directly exchanges one currency for another at the current exchange rate. CFD trading replicates the price movements of currencies but does not involve direct ownership of the underlying assets. The main differences are that with CFDs the trader does not actually own the currencies and trades based on the provider's prices rather than direct exchange rates. CFD providers also act as the counterparty and market maker for all trades, which could potentially put the trader at a disadvantage compared to spot trading if the provider experiences losses or manipulates spreads.

1. Forex CFDs
versus Forex
Spot Trading
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2. 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.

3. 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.

4. 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.

5. 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 BoE’s Non-
investment Products code.

6. 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 provider’s prices.
 A problem with CFDs is that they almost never have exactly the same
identical prices or the same spreads in their underlyings.

7. 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.

8. 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 CME’s currency futures or Tier 1 Banks’ prices and liquidity for
hedging.

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