What many Forex traders don’t 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 Foreign exchange 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 real 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`type of trading.
The Forward Market
The Forex forward market is a completely separate market from the spot. You’ll find that when looking at currency pairs in the forward Forex market, the quotes are different to those found on the spot rates.
This is a function of what the market is actually providing. As you may have gathered from the name of the forward market – this particular arena is offering rates to buy foreign currencies in the future. There are many of various quotes for different time frames. For instance, the following time scales might offer different rates to trade at:
* 30 days
* Three months
* Six months
* 1 year
Many spot Forex traders utilize forward rates to help them predict the future movements of a particular currency pair. The truth 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 twelve 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 requirements 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 time scales like the forward market.
Swap rates are used by large corporations trying to hedge their overseas exposure, or by importers and exporters that do not want to trade a specific 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.
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