What is Forward Trading?

Forward trading is a way of trading Forex instruments, in which the delivery date of the contract is later than the 2 days of spot Forex trading. Forwards are not instruments in their own right, in the same way that options are not instruments – rather they are a different way of trading currencies. The spot Forex market has a set delivery date of 2 days. In Forex forwards, the delivery date (also known as the Value Date) is at some predefined point in the future, between 3 days and 6 months from the current day. The forward price on a Forex instrument differs from the spot price because it takes into account the annual interest rates of each currency as well as the duration between now and the selected value date. This information is plugged into a formula that determines the swap rate. The swap rate, added to the spot rate, results in the forward rate. As a result, forward trading can be an opportunity to take advantage of interest rate differentials between two currencies.

Forwards may be most beneficial to traders who know they are planning to keep a Forex position open longer than a few days, because overnight rollover charges are not applied to forwards.