|
Forex Forward Trading
Forward trading is an agreement to sell or purchase an amount of foreign currency at a future date and time at a set predetermined price.
When you identify trade opportunities and trade foreign exchange you are usually quoted a spot price. A spot price means that if you choose to take no further steps, your forex trade will be settled after 2 business days. This makes sure that your trades are done subject to supervision by certain regulatory authorities for your own security and protection.
Commercial customers may need to convert currencies for international payments when they are identifying trade opportunities. Investors, on the other hand, will normally want to swap your trade forward to anther later date i.e. forex forward trading. FX forward trading can be undertaken on a daily basis or is sometimes undertaken for a longer period at a time. Investors will often swap their trades forward anywhere from 7 days or up to a couple of months depending on the investment’s time frame.
Although forward currency future trading is for a future date, it’s important to keep in mind that the position can be closed out at any time. This means that the closing part of the position is then swapped forward (to ensure forward trading) to the same future value date.
Some people take a dim view of forex forward trading and define it as an illegal activity in which a forex trader takes a position in equity in advance of a trade action which he knows his brokerage will take, which will move the equity's price in a certain predictable fashion. Foreign currency forward trading is also referred to as front running.
If you are using a broker and want to protect yourself from any FX forward trading illegal activities, you need to know how your broker makes money. You can’t just assume that your broker will always be honest when looking out for FX trade opportunities.
Firstly, brokers are supposed to make their profit from a percentage of the spread they charge you, whether for foreign currency forward trading or any other deal. If the spread is two pips, one pip is for them, and one goes to the bank that they made the trade with.
Let’s just say that that's how it is supposed to work, although some traders are tempted to trade against their traders, and don’t just act as middle man. They have figured out that up to 90% of forex traders are losers. So they can be winners if they trade opposite.
This can get ugly when the brokers give you a bad spread that depends on whether you're buying or selling. This means that they are taking advantage of dodgy FX trade opportunities and doubling their take on the spread. You will of course not see this as its all happening behind the scenes.