What many Forex traders do not know is that there is actually more than one type of Forex market to trade on. Yes – most brokers will only offer one (the spot Forex market) – but there are a few Forex brokers out there who have flexibility as to the market that you are able to trade on.
In this article, we will take a look at the other Forex markets, and try to examine the difference between them and the spot market. This should provide you with a better idea of exactly which market is best for your style of trading.
The Forward Market
The Forex forward market is an entirely separate market from the spot. You will find that when looking at currency pairs in the forward Forex market, the quotes are completely different to those found on the spot rates.
This is a function of what the market is actually providing. As you might have gathered from the name of the forward market – this particular arena is offering rates to buy foreign currencies in the future. There are a number of different quotes for different time frames. For example, the following time scales might offer different rates to trade at:
- 1 month
- 3 months
- 6 months
- 12 months
Many spot Forex traders utilize forward rates to help them predict the future movements of a particular currency pair. The reality is that a 12 month forward Forex rate is the price that traders expect the currency pair to be trading at on the spot market in 12 months time, and therefore this is often a good measure of the future moves of the market.
Another market entirely separate from the spot and forward Forex markets is the Swap Market. This market is used in complex currency trades, which are often far beyond the needs of mainstream retail spot traders.
Swap rates are those which are used when transferring real currency from one country to another, without the need to actually convert the currency. Whilst the swap rates are often similar to spot market Forex rates, the swap market also has timescales just like the forward market.
Swap rates are used by large corporations trying to hedge their overseas exposure, or by importers and exporters who do not want to trade a particular currency pair at the current time, but still need to pay their counterpart in another country. Often, the swap market doesn’t even get a mention by Forex brokers because of its complexity.