What is forex and CFD trading?

What is forex?

Forex means foreign exchange: exchanging one currency for another. Currencies are traded in pairs because the value of one currency is expressed in terms of another. For example, EURUSD compares the euro with the US dollar. If its price rises, the euro has strengthened against the dollar; if it falls, the euro has weakened against the dollar.

The foreign exchange market supports international trade, investment and currency conversion. Participants include banks, businesses, central banks and individual traders. Much of this activity takes place through a global network rather than on one central exchange. Forex is generally available around the clock during the trading week, although holidays, market conditions and a provider’s trading schedule can affect access.

What is a CFD?

CFD stands for contract for difference. It is an agreement between a trader and a provider to settle the difference between an instrument’s opening and closing prices, adjusted for position size and applicable costs. You do not own the underlying asset. For example, a gold CFD gives exposure to gold price movements without buying or storing physical gold.

CFDs can reference different markets, including currencies, shares, stock indices and commodities. Forex describes a market, while a CFD describes a type of financial contract. The two can overlap: a retail forex position may be offered as a CFD, depending on the provider and jurisdiction. Always check the product documentation to understand exactly what you are trading and which rules apply.

How positions gain or lose value

A buy position, also called a long position, gains from a rising price and loses from a falling price, before costs. A sell position, also called a short position, works in the opposite direction. CFDs generally allow either direction without owning the underlying asset. Neither direction is inherently safer: an unfavourable price movement can create a loss in both cases.

Your result depends on the size of the position as well as the price change. Costs also matter. These may include the spread, which is the difference between the buying and selling prices, commissions and overnight financing charges. Exact charges depend on the instrument and account terms. MT5 displays prices and lets users place orders, but using a platform does not remove market risk.

Worked example: a currency CFD

Consider a hypothetical EURUSD buy position of 0.10 standard lot. One standard lot represents 100,000 units of the first currency, so this position represents 10,000 euros. Suppose the position opens at 1.1000 and closes at 1.1020. The increase is 0.0020, or 20 pips. A pip is a common measure of a currency pair’s price movement.

For EURUSD, one pip is worth USD 10 per standard lot, so it is worth USD 1 for a 0.10-lot position. The gross gain is therefore 20 × USD 1 = USD 20. If the closing price were instead 1.0980, the gross loss would be USD 20. These hypothetical results exclude costs; applicable charges reduce a gain or increase a loss.

Leverage and the risks

CFDs are leveraged products. You usually provide a deposit called margin rather than paying the full value of the market exposure. For example, at hypothetical leverage of 1:100, USD 100 of margin supports USD 10,000 of exposure. Margin is not a purchase price or a maximum loss. Gains and losses are based on the full exposure, not just the deposit.

For that USD 10,000 exposure, a 1% adverse price move would produce a USD 100 loss before costs, assuming the exposure is denominated in dollars and other factors remain unchanged. This shows how a relatively small market move can consume the initial margin. Providers may close positions when account equity falls below required levels, and rapid price changes can affect execution.

CFDs carry a high risk of loss. Before using a live account, understand margin requirements, charges, order execution and any protections that apply in your jurisdiction. A demo account can help you practise platform functions, but simulated results do not establish likely live results. In the next lesson, you will learn how currency pairs are quoted and how to read their prices.