What is a Swap on the Forex currency exchange?

What is a Swap on the Forex currency exchange?

What is a Swap on the Forex currency exchange?

Most traders tend to avoid trading on daily charts due to the fact that there is a currency swap on Forex. In other words, traders try to avoid the additional fee that they have to pay for holding a position for more than a day. However, there is such a thing as a positive swap on Forex. And today we will try to understand all this.

 

Today we have the task to answer two of the most important questions: is a currency swap on Forex an extra loss or is it an opportunity to earn extra money? Can a Forex trader not pay a swap?

 

Let's start, of course, with the basics. What does a swap mean? This is the difference between the interest rates of the two currencies. It is either credited to the trader's account or withdrawn from him when he moves his trade to the next day. As you have already understood, Forex currency swaps can be both positive and negative.

Why should a trader pay for the transfer of their trade at all?

 

And the reason is very simple. The fact is that when buying any currency pair, we do not need to get any real currency supplies. We don't need to buy another currency for one currency. All we need is for the price to go up or down – it all depends on our interests. This is why we pay a swap: the trader only speculates on a currency pair, and does not get real deals, for which the swap is charged.

 

Let's try to consider a currency swap on Forex as an example: buy a pair of euros / dollars. Roughly speaking, we buy EUR and sell USD. Let's imagine that the rate for the Euro is 2 percent, and for the dollar-1. After we move the position to the next day, we will get a positive swap:

 

2-1 = 1

 

Consider the reverse example of a currency swap. Selling the Euro / Dollar pair. Here, respectively, there is a sale of the Euro and the purchase of the dollar. Take the same interest rates as in the previous example. We get, respectively, a negative swap.

 

1 – 2 = -1

 

So, what is a swap in simple terms? A swap is nothing more than a transaction transfer operation to the next day.

 

So why does a trader have to pay a swap?

 

As you know, if we sell a currency, we initially do not have it – we borrow it. That is why we, the traders, have to pay a percentage (for example, if, again, we consider the example above, it is 1% per dollar) for the transfer of the transaction to the next day.

 

And, of course, if we sell something that we don't have, we also pay interest. After all, we have no currency – we pay for what we borrowed.

 

Here you can also answer the following question: how to make money on Forex swaps?

 

See, for example, we bought, again, a dollar. By purchasing a currency, we give our consent that other traders can use our transaction to sell the dollar. And, accordingly, we get the dollar interest rate for this.

 

And, again, when we sell, we pay the interest rate for providing the loan.

 

In fact, we are once again answering the question of what is a swap-the difference in interest rates.


How can I find this indicator in the terminal?

 

A Forex currency swap starts being displayed the moment You enter a trade. And, accordingly, if you hold it for transfer to the next day, then you can find it in the terminal next to the profit indicator (as well as the loss, price, and so on). There will be a column called "Swap". And, accordingly, you will be able to see both positive and negative indicators there.

 

Important! In the night from Wednesday to Thursday, the currency swap on Forex is tripled – this is due to the fact that banks do not work on weekends, but we still pay the interest rate (in the case of a positive swap, we get it). Therefore, it is important to remember this.

 

You also need to know that the swap itself is calculated around one o'clock in the morning Moscow time.

 

Here you should also keep in mind that different Forex brokers have different swaps. And this information should be immediately clarified either on the website or with technical support.

 

A currency swap on Forex will not bring you big losses. Many traders really think that moving a deal in the future can banal ruin his Deposit, but this is not the case.

 

Tell us, do you often trade non-standard currency pairs? I think not. Large swaps that you can really feel on your Deposit exist only there.

 

And Central Bank rates, As you have already understood, are really low. Imagine, for 14 days of trading on the Euro / dollar currency pair, You would get about 5-7 Swap points. Agree that the plus or minus is quite insignificant.

 

And, accordingly, believe me, if Your position is held for less than two weeks, then you can simply ignore the currency swap on Forex.

 

It is important to remember that a Forex swap is not a guarantee of losses. You should not be afraid of it, you should not avoid it.

 

And if your transactions last about several months (or maybe even years), then, accordingly, first of all, you need to devote time to this information.

 

However, it is also possible to avoid accrual of swaps – this is where swap-free accounts come to the rescue. As a rule, almost every broker allows a trader to open such an account, but there is one "but" - the Commission for transactions will be increased. Why? You understand that the broker also needs to compensate for losses.

 

Swap transactions on the foreign exchange market are usually divided into three most popular types:

Spot Forward (standard) - the first exchange takes place on the second day, after entering the position. Reverse exchange – for example, three months after the first exchange. In other words, the first date is spot, and the last one is forward.
Forward – forward (forward) - in this case, the first exchange occurs at the time of the first forward date, and the reverse occurs later-forward-forward date. Considered example. The forward-forward swap will start in 2 months after entering the deal, and will end in 4 months – we have a 2x4 forward-forward swap. In other words, the first deal is a forward, and the last one is a later forward.
Short swaps (one – day/short) are, respectively, the most common type. This is a Forex currency swap that lasts less than a month. In other words, each trade falls on the date before the spot.

 

There are quite a lot of Forex strategies that are used for trading with swaps. One of these, for example, is Kerry trade.

 

The principle of operation is that you hold a position for as long as it is possible to get an exceptionally positive swap on Forex – this works, of course, only on those pairs that have a really impressive positive swap. For example, it is almost useless to use this on the Euro/dollar instrument. Why? They have absolutely minimal swaps. And the carry trade strategy is a strategy that requires a high currency swap on Forex. This is the only way to make money with it.

 

A few recommendations on currency pairs that can be used for trading on carry trading.

 

Initially, consider the unsuccessful option.

 

The AUD/DKK currency instrument is a negative Forex currency swap on short positions, but we are not interested in it. Long positions – 2.5 points. It would seem that you can really earn good money here. However, in this case, you need to pay attention to the spread – it is 23.9 points of profit. Accordingly, due to the large Forex Commission, we will not use this pair, as it really will not be possible to earn on it.

 

If we consider the EUR/NOK pair, we will see that its currency swap on Forex is 2.5 points, and the spread is only 0.1 PT. Accordingly, nothing will prevent us from entering into transactions and then holding it for a long time. But it is also necessary to take into account an important point – the global downward trend. Why? We need to get a positive swap, not a negative one. And, accordingly, in this case, you can simply merge your Deposit. That is why it is necessary to look for exactly those pairs whose currency swap on Forex will be high, and the global trend for the currency pair will go only in our direction. It should be noted here that a global trend is a trend line that goes on for years, not a few weeks. Keep this in mind.

 

This currency pair is fully suitable for our requests. And, accordingly, we can easily use the EUR/NOK pair to trade using the carry trade strategy.

 

And, of course, if you want to learn how to make money using a new strategy or currency pair, be sure to start trading on a demo account. You do not need to constantly test your Deposit strength – at one point you can just merge it.

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