How does forex CFD trading work?
If you’re wondering how forex trading works in a CFD account, the steps below outline a general process that traders may follow in practice.
Choose a pair and a direction: Go long (buy) if you expect the base currency to rise. Go short (sell) if you expect it to fall.
Size the trade: Positions are measured in units (e.g. micro/mini/standard lots of the base currency).
Manage risk: Attach stop-loss and take-profit orders and keep an eye on funding/overnight holding costs if you keep positions open past the session’s cut-off.
React to information: FX is sensitive to economic releases (inflation, employment data), central-bank guidance, risk sentiment and more.
What is leverage in CFD forex trading?
When trading forex CFDs, leverage enables traders to gain exposure to a larger position by depositing only a fraction of the trade’s total value, known as margin. This magnifies both potential profits and losses. The difference between the total trade value and the trader’s margin requirement is usually ‘borrowed’ from the forex broker. Traders can usually get more leverage on forex than on other financial instruments, meaning they can control a larger sum of money with a smaller deposit.
Since forex CFDs are traded on margin, you only have to deposit a percentage of the full amount you want to trade. You can find full details of our margin rates, holding costs, and spreads for forex majors, minors, exotics, and forex indices on our forex product page.
What is spread in CFD forex trading?
The spread in forex trading is the difference between the buy and sell prices of an FX currency pair. When you trade forex pairs, you’re presented with a ‘buy’ price that is often above the market price and a ‘sell’ price that is often below the market price. The difference between these two prices is referred to as the ‘bid-ask’, or ‘buy-sell’ spread.
How does the foreign exchange market work?
The FX market is decentralised, meaning there’s no single exchange. Trading takes place electronically across a global network of banks, market-makers and liquidity providers, operating 24 hours a day from Monday morning to Saturday morning (AEST). Liquidity can often peak during London–New York overlaps, with active flows in Asia for AUD, JPY and regional pairs.
Participants include central banks (policy and stability), commercial/investment banks (market-making and client flows), corporates (payments and hedging), asset managers (allocation and hedging) and retail traders (speculation and risk management). Understanding how these players behave can help you read trends and liquidity conditions.
What moves the foreign exchange markets?
Macro-economic conditions and policy settings often influence currency markets. Below are four commonly referenced factors that frequently appear in economic calendars and FX commentary.
Political instability and economic performance
Political instability and poor economic performance can also influence the value of a currency. Politically stable countries with robust economic performance will usually be more appealing to foreign investors, so these countries draw investment away from countries characterised by more economic or political risk.
Furthermore, a country showing a sharp decline in economic performance could see a loss of confidence and investment, as capital moves to more economically steady countries.
Interest rates
Interest rates, inflation and exchange rates tend to move in relation to one another. Central banks adjust their policy rates to influence inflation and broader economic conditions. When a central bank aims to reduce inflation, it may lift interest rates to encourage saving and make borrowing more costly. Higher rates can reduce overall spending and credit growth, which may support the value of the domestic currency by making it relatively more attractive to hold.
When interest rates are low, borrowing often becomes cheaper and credit expands. This can increase spending by households and businesses. If demand rises faster than the supply of goods and services, prices may climb, contributing to higher inflation and a potential decline in the currency’s value. Because exchange rates can respond to changes in interest rate expectations, forex traders often pay close attention to monetary policy announcements from central banks such as the US Federal Reserve or the Bank of England.
Terms of trade
The terms of trade for a country represent the ratio of export prices relative to import prices. If export prices rise relative to import prices, the terms of trade improve, meaning the country can purchase more imports for the same number of exports. This improvement can increase national income and may lead to stronger demand for the country’s currency, which in turn can support a rise in its value.
Debt
A nation’s level of debt can influence movements in its currency. Countries with relatively high debt compared to their gross domestic product (GDP) may be viewed as less attractive to some foreign investors. Reduced foreign investment can limit the availability of foreign capital, which in some circumstances may contribute to higher inflation and downward pressure on the currency’s value.
What are the benefits of CFD forex trading?
Some of the main benefits of CFD forex trading that make this asset class a popular choice among traders are:
The ability to trade on margin (using leverage).
High market liquidity, which can help keep spreads tighter.
Prices can react quickly to breaking news and economic announcements (this can be a disadvantage, too).
Trade 24 hours a day, Monday morning to Saturday morning (in line with global market hours).
The ability to take both long and short positions, providing flexibility to speculate on rising or falling prices.
Wide range of markets.
Find out more about using leverage in forex trading.
What are the risks of CFD forex trading?
Some of the possible risks involved in CFD forex trading are:
Loss of capital: Leveraged forex trading means that both profits and losses are amplified and based on the full value of the position. You could lose all of your invested capital.
Account close-out risk: Market volatility and rapid price movements can cause your account balance to change quickly. If you do not have sufficient funds to maintain open positions, there is a risk that they may be automatically closed by the platform.
Market volatility and gapping: Financial markets can fluctuate rapidly, and price gaps may occur as a result of volatility. This can cause stop-loss orders to be executed at less favourable prices than expected.
Why trade forex with CMC Markets?
A powerful platform: Advanced charting, drawing tools and integrated economic calendars help you analyse and act on opportunities fast. Get a visual walkthrough with our platform guide.
Wide product range: Trade a massive selection of FX pairs alongside indices, commodities and more – all from one account.
Education first: Build your skills in the Knowledge Hub and learn about the best forex trading strategies.
Practise before you trade: We offer a demo account with virtual funds that allows you to explore our platform and practise trading strategies and techniques before moving to a live account.
Get started: Open an account and get familiar with our forex products.
Ready to turn the theory of what is forex trading and how does it work into a structured process? Start forex trading with CMC Markets today.
This article provides general information only. It has been prepared without taking account of your objectives, financial situation or needs. It is not to be construed as a solicitation or an offer to buy or sell any financial instruments, or as a recommendation and/or investment advice. It does not intend to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any financial instruments. You should consider your objectives, financial situation and needs before acting on the information in this article. CMC Markets believes that the information in this article is correct, and any opinions and conclusions are reasonably held or made on information available at the time of its compilation, but no representation or warranty is made as to the accuracy, reliability or completeness of any statements made in this article. CMC Markets is under no obligation to, and does not, update or keep current the information contained in this article. Neither CMC Markets nor any of its affiliates or subsidiaries accepts liability for loss or damage arising out of the use of all or any part of this article. Any opinions or conclusions set forth in this article are subject to change without notice and may differ or be contrary to the opinions or conclusions expressed by any other members of CMC Markets
