What is CFD in forex? Meaning and how it works in South Africa
Team Exness
This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.
Share:
CFD trading in forex allows traders to speculate on currency price movements without owning any of the underlying currencies. It’s a more flexible way to trade the forex markets, with the opportunity to trade both rising and falling markets.
In this guide, we explain what is CFD in forex trading, what the term means, and how it works for South African traders.
What is CFD forex trading?
Let’s start with the basics: What is a CFD in forex?
Forex is short for “foreign exchange” and refers to a global market where currency pairs are traded. Each pair consists of the base currency and the quote currency. In ZARUSD, the base currency is the ZAR (South African rand), and the quoted currency is the USD (United States dollar). If you think the price of the South African rand will increase against the US dollar, you can open a buy position on ZARUSD, which effectively means you’re buying ZAR and selling USD to profit from the different rate.
Of course, you don’t want to physically trade large amounts of ZAR or USD, and this is where CFDs come in.
CFD stands for “Contract for Difference,” a derivative contract where you and your broker agree to exchange the price difference between the opening and closing price of your chosen currency pair.
A candlestick chart showing ZARJPY on the 30-minute timeframe on the Exness Terminal.
Definition and key terms
To summarize:
- What is a CFD? A Contract for Difference—an agreement between a trader and a broker to exchange the difference in a currency pair’s price from open to close.
- What is forex? Forex is short for “foreign exchange”. It’s a global marketplace where currencies are exchanged.
- What is a CFD in forex? A financial derivative that lets you trade on price movements in currency pairs without owning either currency.
Other key terms you may come across:
- Leverage: Traders can use leverage to control larger positions than their account’s balance would allow. For example, 1:10 leverage would allow an account with a 1,000 ZAR balance to control a position of 10,000 ZAR. This, however, increases potential returns as well as risk exposure.
- Pip: The smallest unit of movement in a currency pair. A price movement from 1.1000 to 1.1020 is 20 pips.
- Spread: Measured in pips, the spread is the difference between what the buyer wants to pay, known as the “bid” price, and what the seller is willing to accept, known as the “ask” price. In forex trading, a tighter spread means lower trading costs.
- Stop loss: A predetermined price set by the trader to automatically close a trade when the price drops to that value to minimize losses.
- Take profit: The trader sets a target price that will automatically close the trade when that target is hit. This is how you can secure potential profit before the market moves in the opposite direction.
How CFDs differ from spot forex
We explained that CFD trading doesn’t involve owning or physically trading the currencies themselves. But what if you want to own those currencies instead?
That’s the role of spot forex trading. The spot forex market involves a direct currency exchange at the current market rate (the “spot” price). There’s no leverage or broker commission, and you take full ownership of the currency.
For example, a spot trader may buy 20,000 EUR in EURUSD, expecting the euro to strengthen against the US dollar. If the price increases over the next few days, they can exchange their EUR for USD and profit from the difference.
Spot forex has no expiry dates, so it’s a more straightforward approach. However, it requires a larger upfront investment and offers less flexibility compared to CFD trading. For beginner traders with smaller accounts, CFDs may offer greater access and versatility, depending on your investment goals and risk tolerance.
CFD meaning in forex and how it works
Now that we’ve answered what CFD in forex is, let’s examine how it works in practice.
Open and close price structure
The profit or loss from a CFD forex trade is based on the difference between the opening and closing prices.
For example, let’s say you opened a buy position in EURUSD at 1.1000 and then closed when the price reached 1.1050. If each pip equals 1,000 ZAR, this 50-pip move would translate to a profit of 50,000 ZAR—1,000 x 50 = 50,000 ZAR. However, if the price moved 50 pips in the opposite direction, with the trade closing at 1.950, it would lead to a loss of 50,000 ZAR.
Long vs short positions
After selecting a currency pair for a CFD forex trade, you must decide whether to buy or sell, also known as going long or short:
- “Buy” or “long” position: You expect that the price will rise.
- “Sell” or “short” position: You expect that the price will fall.
When you open a buy position, you want to close it at a higher price than where you started. When you open a sell position, you want the price to drop below your opening price before you close. So, getting the direction right matters, but closing at the right time is just as important.
No ownership, only price speculation
Remember, CFDs are speculative contracts. You’re not agreeing to take ownership of any physical currency now or in the future. You are merely seeking to profit from the difference in the opening price and closing price of the trade.
Why traders in South Africa use CFDs
We’ve covered what is a CFD in forex trading and how it works, but why are CFDs so popular?
The forex market moves trillions of dollars daily, and CFDs let traders access the markets without needing large amounts or visiting a physical currency exchange. Here are a few reasons why they’ve become the preferred choice for financial market enthusiasts.
Flexibility and leverage
Leverage gives traders flexibility. It means they can control larger positions with less capital and potentially profit from small price fluctuations. After all, currency prices rarely experience major swings over the course of a day or even a week. The daily price movement for EURUSD, for example, is usually between 50 and 90 pips a day, and it’s rare to see movements beyond 100 pips.
With leverage, traders can realize profit from movements of even just a few pips. However, the market can also move against their position, in which case leverage can amplify potential losses as well. To manage some of these risks, traders can use tools such as stop loss orders, which automatically close a trade when the price hits a set level based on the trader’s risk tolerance.
Click on your account balance in the Exness Terminal to see settings such as leverage and margin.
Trading in rising and falling markets
With CFDs, traders have the opportunity to profit from both rising and falling markets. If they think the value of a particular currency will strengthen, they can buy or “go long.” If they think it will drop, they can sell or “go short” to capitalize on the price move. Combined with the multitude of currency pairs on offer, an experienced trader can analyze trends across a number of different assets and find multiple opportunities in a single trading session.
Popular forex pairs for CFD trading
Exness offers 100+ currency pairs for CFD forex trading. Some of the most actively traded include:
- EURUSD: The euro vs the US dollar.
- USDJPY: The US dollar vs the Japanese yen.
- GBPUSD: The British pound vs the US dollar.
- AUDUSD: The Australian dollar vs the US dollar.
- USDCAD: The US dollar vs the Canadian dollar.
- EURGBP: The euro vs the British pound.
Click “Majors” in the “Instruments” panel to see all major currency pairs in the Exness Terminal.
How to start CFD trading in South Africa
Now that you have a clear understanding of what is a CFD in forex trading and how it works, you can take the next step. Here’s how to start trading forex in South Africa.
Choose a regulated broker
A regulated broker is one that is licensed to offer brokerage services in your country. In South Africa, brokers must be licensed by the Financial Sector Conduct Authority (FSCA). You can usually find this information in the footer of a broker’s website. If it’s missing, the broker may not be regulated.
If a broker is unregulated, it means they haven’t undergone the strict licensing procedure implemented by the FSCA and likely don’t adhere to its code of conduct. If anything goes wrong while trading with such a broker, you will have little recourse. So, always check that the broker is licensed, and never assume it’s operating legally without doing your due diligence.
Exness ZA (PTY) Ltd is authorized by the Financial Sector Conduct Authority (FSCA) in South Africa as a Financial Service Provider (FSP) with FSP number 51024. Exness (SC) Ltd is also authorized by the FSCA as an Over-The-Counter Derivatives Provider (ODP).
Open a demo or real account
Once you register with a broker, you’ll typically choose to open a demo trading account or a live trading account. If you’re new to trading, it’s best to start with a demo.
A demo account is a risk-free trading account that lets you trade with virtual money and doesn’t require a deposit. This means you can use the same platform, tools, and charts available in live trading without the risk.
Demo accounts are a great way to learn how trading works, test your strategy, and familiarize yourself with the trading platform before investing real money.
Learn to manage risk and margin
The more you learn, the better you’ll manage risk and margin requirements when trading. Using a demo account helps you practice, but experience alone isn’t enough. Learning about different strategies you can use, exploring technical indicators and charts, and following real market analysis can help you avoid common mistakes.
You can find reliable content on platforms like YouTube, through written guides, and by tracking financial market updates. Tools like stop loss and limit orders, trading calculators, and currency converters can help you manage risk with greater control.
Exness has various tools and resources to help plan your trades, including a trading calculator and a currency converter.
CFDs vs other financial instruments
CFDs are just one type of financial derivative you can trade with a regulated broker. To better understand what a CFD is in forex trading, it helps to see how CFDs compare to some other financial products available.
CFDs vs futures
Futures are contracts where two parties agree on a set price and delivery date for an asset in the future. In the past, they were primarily used in the commodities market to negotiate a price for future production. For example, a farmer could sell a future harvest of wheat at an agreed-upon price, and if the price increased before the harvest, the buyer could sell the contract to someone else and profit from the difference.
So, futures have an expiry date, and the contract can be sold before that date. CFDs never expire, and positions can remain open as long as needed, provided the margin requirements are met. This makes forex trading more flexible for traders who prefer greater control over when they can enter and exit a trade.
CFDs vs ETFs
Even if you know what a CFD in forex trading is, it’s worth exploring how CFDs differ from ETFs, or Exchange-traded Funds.
An exchange-traded fund can track the performance of a group of assets like currencies, stocks, or commodities, and is traded on a stock exchange. ETFs are also considered a long-term investment with similar diversification benefits as indices trading.
Since ETFs can hold multiple assets, risk exposure is spread across different markets, but traders may prefer the flexibility offered by CFDs, which allow more control over trade size, leverage, and timing.
CFDs vs Direct asset trading
Direct asset trading, also known as Direct Market Access (DMA), lets traders place orders directly on an exchange’s order book without the need for intermediary brokers. This gives more control over pricing and execution and allows the use of more advanced trading strategies.
However, direct asset trading is a more complex approach than CFD trading and is usually reserved for experienced and professional traders who trade in large volumes throughout the day.
Trading CFDs with Exness
If you feel ready for the next step, you can sign up for an Exness account to get started. We’re a licensed and regulated broker offering leading trading conditions on a wide range of financial instruments.
You can start practicing with a demo account and switch to live trading with real money whenever you’re ready. Our standard accounts don’t have minimum deposit requirements, and we support several local and international deposit and withdrawal methods, giving you hassle-free access to the markets and your funds at any time.
Currency pair CFDs on Exness South Africa
These are all of the “Major” currency pairs available through the Exness Terminal, but there are also many “Minor” and “Exotic” pairs:
- AUDUSD
- EURUSD
- GBPUSD
- NZDUSD
- USDCAD
- USDCHF
- USDJPY
Search results for “ZAR” in the Exness Terminal, showing all currency pairs that include the South African rand.
Using MetaTrader 4 and MetaTrader 5 for CFD trading
In addition to the Exness Terminal and the Exness Trade app, South African traders can also use MetaTrader 4 and MetaTrader 5. Both platforms offer a wide selection of tools, charts, and financial instruments for CFD trading.
Many forex traders lean more toward MetaTrader 4, as it was designed primarily for forex trading, while MetaTrader 5 supports a broader range of assets. However, you can trade forex CFDs on both, so it all comes down to personal preference.
How Exness supports CFD traders in South Africa
Exness is licensed to operate in South Africa, but we also offer services tailored to South African traders’ needs:
- Local and international payment methods.
- Flexible leverage options.
- Competitive spreads.
- 24/7 access to funds¹.
- Zero in-house commission on deposits and withdrawals².
- Localized customer support and help resources.
- The lowest stop out level in the market³.
Check out our Risk Disclosure and Privacy Policy to learn more about our policies and how we protect South African traders.
Frequently asked questions
Yes, CFD trading is legal in South Africa. It is regulated by the Financial Sector Conduct Authority (FSCA), which sets the regulations for brokers to follow and issues licenses to legitimate operators.
There is no minimum deposit requirement for Standard accounts on Exness, depending on your payment method and country of residence. You can fund your account with any amount that fits your budget. We recommend starting small when you are still learning how the platform works, but you can also use a risk-free demo account to practice without making a deposit.
Yes, MetaTrader 5 (MT5) supports forex CFDs, along with other financial instruments like stocks and stock indices. The platform was designed for multi-asset trading and suits both beginners and experienced traders.
Share:
Start trading
This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.
- Processing times may vary depending on the chosen payment method.
- Third-party fees may apply depending on the chosen payment method.
- "The lowest stop out level in the market" is based on February 2025 analysis against competing brokers.