A Forex swap also called a Currency Swap, or a Forex Rollover, is one of the most confusing terms in Forex trading. You have a good understanding of how the Forex swap can positively or negatively impact your trading profits.

An understanding of how Forex swaps work is essential. Organizing your trading strategy and money management will be easier if you understand this.

What is the Forex Swap?

In the Forex market, a swap is a form of interest charged on overnight positions. Contracts for Difference (CFDs) are also subject to a swap fee. Trading positions open overnight incur the overnight position charge.

There are two ways to calculate the swap value: by looking at the swap rate and assuming either a positive or negative position on the trade. Holding positions overnight will either incur a fee or be rewarded with a fee.

Trades on leverage are subject to swap rates. Because opening a leveraged position essentially involves borrowing funds, this makes sense.

Forex trading, for example, involves buying one currency in a pair and selling the other.

When you open a position, you are effectively making two trades. 

A sale of one currency effectively involves borrowing that amount, which entails paying interest on the borrowed amount. You will, however, earn interest if you buy currency.

When are Swaps charged?

It is up to your broker to determine when the swap will apply to your trading account. The fee usually appears around midnight, between 23:00 and 00:00 server time.

The swap may occur even when a position does not exist over the weekend, which is not always known. Depending on the market, the weekend swap takes place on Fridays or Wednesdays to compensate for market closures over the weekend.

Swap Free trading accounts

Are trading accounts without swaps available? It’s true. There is no Forex swap on Islamic accounts.

Islamic finance prohibits the charging of interest by lenders. Trading fees may also apply to Islamic accounts, such as a weekly fee at the beginning of a transaction, or they may not apply at all.

Can you make money with Swaps?

Since each currency has its official interest rate, the swaps applied to each currency may differ (and they do). A trader can benefit from a positive or negative interest rate difference.

There is usually an interest charge on currencies sold and an interest payment on currencies bought. The swap (the interest rate difference) can credit the trading account.

Carry Trade strategies involve making money by varying the interest rates between the currencies.

Currency Swap strategy

One of the most common Forex swap strategies is a “Carry Trade”. How does a carry trade work? Investing in a currency with a higher interest rate while borrowing a currency with a low-interest rate is called a carry trade.

In the traditional model, the Japanese Yen would be borrowed to invest in Australians or New Zealanders. A carry trade is a long-term strategy which requires choosing currencies whose exchange rates differ significantly.

Any profit from collecting the daily swap is at risk if a market movement occurs unexpectedly.

Bottom line 

You must pay attention to the contractual documents to know the existing conditions since the swap is a commission that applies to your broker. Trading platforms allow you to see information about financial assets in greater detail, including swaps. 

If you have questions regarding the aspects discussed in this article, you can contact your intermediary through customer service.

 

Arthur Sweat