In the name of Allah, the inspirer of truth
This guide explains what’s really happening behind the scenes when you trade forex online, how those trades work, and how this.
If you’ve ever used a Forex app or trading platform, it might look like you’re buying and selling real currency, like exchanging pounds for dollars or euros.
But in most cases, that’s not what’s happening.
What’s really happening is that you’re entering a deal with the platform:
“If the price goes up, you win money. If it goes down, you lose money.”
It feels like trading, but no real money is exchanged between currencies. You’re not buying dollars, and you’re not selling euros. You’re just making a bet on how the price will move.
This setup is called a CFD (Contract for Difference) or sometimes spread betting. These tools are designed to mirror real markets, but you never touch the actual currency.
So even though it looks like a currency exchange, no real currency changes hands. Your profit or loss is just a number on the screen.
There is such a thing as real forex trading. It’s called spot FX, and it’s how banks, hedge funds, and big institutions actually buy and sell currencies with each other.
These trades involve:
But this kind of trading isn’t available to most people. It requires large amounts of capital, institutional access, and special platforms. This is not the apps and websites most people use.
Now that we know you’re not actually exchanging currency, what are you doing when you click “Buy” or “Sell” on a Forex platform?
You’re entering into a financial agreement with the broker that’s based on how the market moves. You’re not buying any actual currency, and nothing is being delivered to you.
This agreement is a type of derivative, a financial contract whose value is based on the price of something else (like a currency pair, stock, or commodity).
There are two main types used in retail Forex:
A CFD is a contract between you and the broker. You agree to settle the difference between:
If the price moves in your favour, the broker pays you the difference.
If it moves against you, you pay them.
This is a derivative because it only tracks the price, you never own the actual thing (like dollars or gold), and there’s no real exchange.
You might also pay overnight fees if you keep the trade open beyond a day.
Spread betting works similarly, but it’s legally treated as a wager, not a contract.
Because it’s classed as betting, you usually don’t pay capital gains tax in the UK.
But you’re still not owning or exchanging anything, it’s just a side bet on price direction.
Feature |
CFD |
Spread Betting |
| What it is | Contract based on price difference | Wager based on price movement |
| Is it a derivative? | Yes | Yes |
| Do you own the asset? | No | No |
| How profits/losses work | Entry vs exit price | £ per point movement |
| Tax (UK) | May be taxable (capital gains) | Usually tax-free |
| Legal status | Investment product (regulated) | Wager (UK law) |
| Where it’s used | Globally | UK & Ireland only |
In forex trading, one of the first things you’ll hear about is leverage.
Leverage means trading with borrowed money.
It lets you control a much bigger trade than what you actually deposit.
Why Use Leverage?
Currency prices typically move very little, often less than 1% per day.
That means if you trade with £100, you might only make or lose £1 or less in a typical day.
On its own, that doesn’t sound very profitable.
This is where leverage comes in.
How It Works
Let’s say you still only have £100, but your broker offers 30:1 leverage, the UK limit for major currencies.
That means your £100 can control a £3,000 trade.
But you’re not borrowing the full £3,000 up front. You just put in a small deposit (called the margin) and the broker covers the rest behind the scenes.
Now suppose the market moves 1% in your favour:
But if the market moves 1% against you:
Leverage makes small price moves feel big, because your £100 is exposed to a much larger trade.
No. leverage is optional.
Some platforms allow you to reduce or remove leverage by trading positions that are fully funded from your own balance.
For example, if you have £100, you could trade £100 worth of currency with no leverage at all, meaning you’re not borrowing any extra funds from the broker.
But here’s the trade-off:
So, unless you’re trading with large amounts of money, your profits (and losses) will be relatively small.
That’s why most retail traders choose leverage, to turn small market movements into larger outcomes. But it also makes the trade much riskier.
And even without leverage, you’re still entering a derivative contract, not exchanging actual currency. So, the trade is still synthetic, not a real transaction.
What Do “Pips” and “Points” Mean?
A pip is the standard unit for measuring changes in most currency pairs.
For pairs like EUR/USD or GBP/USD, 1 pip = 0.0001, or one percent of one percent (also called 1 basis point).
A point, in everyday forex usage, is often used loosely to mean the same thing as a pip — though technically, some platforms define a point as a larger move, such as a change to the left of the decimal.
To keep things simple: in most forex contexts, people use “pip” to describe the small price movements that matter in trading.
If you’re trading £2 per pip on a spread betting platform, and the price moves 50 pips, you’d make or lose £100.
Yes, in many cases, you do.
It’s not always obvious, but interest is built into how most leveraged trades work, especially if you keep them open overnight.
This interest is often called:
All of these refer to the same basic thing:
“A fee you pay (or sometimes receive) for holding a position overnight.”
Why Is There Interest?
When you use leverage, you’re essentially borrowing money from the broker to open a larger position than what you actually own.
If you hold that position overnight, the broker charges you interest on the borrowed amount, usually based on the central bank rates of the currencies you’re trading.
Simple Example:
You open a £3,000 trade using £100 of your own money and 30:1 leverage.
At the end of the trading day, you decide to keep the trade open overnight.
Your broker calculates interest on the £2,900 “borrowed” portion of the trade and deducts it from your account.
The amount can vary depending on:
Rollover = Extending the Trade
If you decide to keep your leveraged trade open overnight, the broker extends it into the next trading day, and this is when a rollover charge (or swap fee) applies, since you’re continuing to hold the borrowed amount beyond one day.
“The rollover process is where the interest is charged, or in rare cases, paid to you (if you’re on the favourable side of the rate difference).”
Situation |
Do you pay interest? |
| Day trade (open and close same day) | No swap fee charged |
| Overnight trade (with leverage) | Yes — interest usually applies |
| Islamic/swap-free account | No swap — may charge admin fee |
Many forex brokers offer a type of account called an Islamic account, also known as a swap-free account.
These accounts are designed for clients who want to trade without paying or receiving interest, which normally applies when a trade is held overnight.
What’s Different About a Swap-Free Account?
In a standard account:
In a swap-free account:
Instead, brokers usually apply a fixed fee or administrative charge to cover the cost of holding the position.
In most cases, the trade itself remains the same. You’re still trading CFDs or spread betting contracts using leverage, just with a different fee model.
Feature |
Standard Account |
Islamic / Swap-Free Account |
| Overnight interest | Yes — swap or rollover fee applies | No interest charged |
| Alternative fee | None (just interest) | Usually a fixed admin fee |
| Trade type | CFD or spread bet | CFD or spread bet |
| Leverage available | Yes | Yes |
| Ownership of asset | No | No |
From an Islamic legal and ethical standpoint, there are three primary concerns with retail forex platforms:
This transforms the transaction into a wager, where profit or loss depends entirely on price direction, not real trade, but outcome prediction.
As such, it constitutes gambling (maysir), which is prohibited in Islam.
This concern typically applies even to accounts labelled “Islamic” or “Sharīʿah-compliant”, as they operate using the same underlying structure.
Some brokers offer “Islamic” or swap-free accounts, where no interest is charged.
These may instead include fixed administrative fees.
However, the gambling concern above still applies in most cases, and depending on how the fees are structured, they may still raise Sharīʿah compliance issues.
Most Islamic-labelled accounts have little or no credible Sharīʿah certification, and most of these “certifications” do not address the derivative issue.
“In Islam, profit must be tied to effort, ownership, or risk-sharing, not isolated financial speculation or capital manipulation.”
While forex trading is widely marketed as a fast and accessible way to earn money, the reality behind most retail platforms is very different from real currency exchange.
Most retail forex trading involves:
Even so-called Islamic or swap-free accounts operate on the same underlying model (often without reliable Sharīʿah certification) and do not resolve the core concerns.
Based on these factors, retail forex trading is not permissible in Islam.
It combines elements of gambling, interest (apart from swap-free accounts), as well as profit without real economic activity, all of which are prohibited.
Muslims seeking ethical and Sharīʿah-compliant financial activity should be aware of how these platforms work (beyond the marketing) and avoid structures that compromise foundational Islamic values around trade, ownership, and fairness.
Derivative
A financial product that gets its value from something else (like a currency, stock, or commodity). In forex, most trades are derivatives. You’re not exchanging real currency, just betting on its price.
CFD (Contract for Difference)
A financial contract (derivative) where you agree to pay (or be paid) the difference in price between when you open and close a trade. You don’t own the actual asset; you’re only speculating on its price.
Spread Betting
A form of trading where you stake a certain amount (£) per point of price movement. It’s legally classified as a bet rather than a contract or investment.
Leverage
Using borrowed money to control a larger trade than you could with your own funds. For example, 30:1 leverage lets you open a £3,000 trade with just £100.
Margin
The amount of your own money you must deposit to open a leveraged trade. It’s like a security deposit (not a fee, but a minimum balance).
Pip
Short for “percentage in point.” A pip is the standard unit for measuring small price movements in currency pairs. For most pairs, 1 pip = 0.0001.
Point
Often used loosely to mean “pip,” but technically refers to a larger move or a full-digit change in some pricing systems.
Swap Fee / Rollover
An interest-based fee charged when you keep a leveraged trade open overnight. It’s the cost of holding onto borrowed money for more than one trading day.
Swap-Free (Islamic) Account
A type of trading account where no overnight interest is charged. These may instead apply fixed administrative fees. The underlying trades are still typically CFDs or spread bets.
Useful Links & References
Core Trading Concepts
Islamic Finance Commentary & Fatwās