The Forex Swap can represent (and most of the time does represent) a cost for the trader. As such, you must know what it is and manage it. Sometimes we find this charge known simply as Swap, while others might refer to it as night premium, “overnight” commission, or even “rollover”. The truth is that all these concepts correspond to the same charge, (although in Forex it can be a credit in account) which is the interest rate applied as a consequence of the money that the broker lends us for the leverage used. If you want to know everything about the swap commission in Forex, do not hesitate to read more.
When trading it is essential to have control over the commissions and other costs associated with the operation, to have an accurate knowledge of the profitability to obtain in each transaction, and avoid unpleasant surprises. The swap is one of these costs, moreover, one of the most difficult because it is usually charged for each day that the trade remains open and it is not easy to calculate its amount.
To what does this amount correspond? How is it calculated? Is it possible to delete it? All these questions are those that we will resolve in these paragraphs.
- Swap on Forex What is it? How is it calculated?
- Swap Forex. When is the swap loaded?
- When are Swap points expenses very important?
- How is Swap calculated in Forex and CFDs?
- Check Swap Points with Metatrader 4
- Can you make money with Swap?
- Swap Forex. Trading accounts without Rollover/Swap
Swap on Forex: What is it? How is it calculated?
Swap is an Anglo-Saxon term that can be translated as “swap” (exchange). If the object of the swap is money, that is, a “financial swap”, it is linked to the interest rate of the swap (with which interest is exchanged).
And what does all this have to do with trading? Simply put, trading in the Forex and CFDs markets uses leverage. Leverage implies that the trader should not invest all the amount required by the transaction, but a fraction of it as a guarantee (the so-called margin). So where does that money come from? Of course, the money is placed by the broker himself and he retains the guarantees to ensure that the possible losses do not affect him.
It can be considered, for all intents and purposes, as a loan that the broker makes. However, as in any loan, it is subject to interest. These interests are charged to the trader’s account and involve a cost (sometimes it is a credit, as we will check later) to which you must pay attention to the proper management of the money and risk management.
At this point, we highlight that the swap not only occurs in the Forex market, it also occurs in other financial markets, as long as it is traded with leverage through CFDs. Before proceeding, as you know, CFDs represent a contract in which price differences of a financial asset are settled, in favour of one and against the other. This in itself assumes that a position is opened with intent to be closed.
Although we believe that there is no maturity and the trader can close the position when he sees fit when trading with CFDs a loan is made for the total money of the transaction for one day. That is, the CFD lasts for one day. It expires the next day.
If the trader holds the trade for more than a day, the broker does not ask for the borrowed money by closing the position. Only one exchange of the interest rate of the borrowed money is (automatically) traded to refinance the position and hold it for another day. In this way, the operations in the Forex market and the CFDs have a duration of one more day. So, the position is refinanced until the trader decides to close his position.
It is called a commission swap (exchange of interest), but you can also find it with the name of “rollover” (refinancing) for this reason.
When is the swap loaded?
If this charge is applied for holding a position more than one day, as we have expressed, it will not, of course, affect those intraday trading operations (day trading). So, if you are a trader that operates under this style, you have to keep in mind that, if you endure the trades so as not to close them with losses, it can be an additional cost each day you keep them open.
You will need to know the opening and closing times of the markets in which you intend to trade through CFDs if you want to open and close positions within the same day. But what is considered a day on the Forex market? Remember that the currency market remains open 24 hours a day, Monday through Friday.
We know that Forex is a decentralized market, where there is no single trading venue and when Europe is closed you can exchange currencies in New York, Sydney, or Tokyo. However, there is an official cut-off time, an hour in which the day is considered to be over and passed to another day.
This concept is called “overnight position”, something like “overnight” or “over-night”. The positions opened during this period become part of another day and the aforementioned refinancing is established. The actual cut-off time is 17:00 according to the East Coast schedule of the United States (New York timezone).
This time is equivalent to 23:00 of Spanish peninsular time, although you will have to take into account the region where the server of the broker with which you operate is located. As a general rule, it is usually applied around midnight.
To make it easier, if you have an operation open at 22:59 hours and close at 23:01 hours (Madrid time), for all intents and purposes this is an overnight position and you will be charged the swap fee (now you can understand why this cost is also called “night premium”, “overnight interest” or another similar term).
You can imagine that the longer you hold an open position, the more impact the swap will have on its outcome. The swap is applied daily and swing traders or a style that involves longer time periods are required to master it (it is part of their job).
It is recommended that you observe in the broker’s conditions when the cut-off time is set and when it coincides with the time in the region you are in. This way, you can have full control over the application of swap commissions on Forex.
When are Swap points expenses very important?
On weekends, Forex is closed, so you will not be able to open or close any position and the swap commission will be applied to every day. You also have to bear this in mind, as you may find a swap charge for three consecutive days (the weekend is multiplied by three the night premium).
Why are we insisting on this? Isn’t it enough to know and close the position on Friday so we don’t have to take on the whole weekend swap? It is not so simple, the positions in the Forex spot market are usually settled after two days. That is when you open or close a position you have an immediate effect on your trading account. But, for the broker, it usually has a value date (date taken for financial purposes) of two days delay.
This can have consequences on the application of the swap commission during the weekend because some brokers advance the collection of this commission these two days. In this way, instead of applying on Friday to the closing of the market, it is charged on Wednesday (at the aforementioned cut-off time).
This is another question that a trader should clarify with his broker. It is usually set out in the terms and conditions when hiring, but you can always use customer service to resolve these issues (hence the importance of good customer support).
How is Swap calculated in Forex and CFDs?
The swap is nothing more than the interest of money on the perceived leverage, therefore, the first factor that comes into play for its calculation is the volume of the position you keep open.
If we operate with a mini-lot (10,000 currency units), interest will be applied to this amount (the margin used is another matter and will depend on the level of leverage allowed). When trading a whole lot (100,000 units of currency), the amount is higher and, despite the same interest, the swap will be higher.
Given this first variable, how much is the interest rate applied to the size of our position? It will depend, first of all, on the official interest rate set by the central bank and, depending on the central bank, on the interest rate on the interbank market. It also depends on the currency used, since not all currencies have the same official interest rate.
They are based on the official interest rates set by the central banks, however, each broker may apply a different interest, depending on the market conditions and the risk they determine. It is what is known as the interest rate swap and you should also pay attention to it if you want to develop an effective trading plan (although this interest rate may vary from day to day).
Swap interest on Forex
In any case, to make a calculation of what the swap would mean on your trading results. There is a simple formula:
Swap= (interest rate swap applied/365 days) * size of your position
Some brokers provide swap point calculators.
Check Swap Points with Metatrader 4
For most trading platforms, the swap commission applied as well as other details of the conditions in the different currencies can be observed. In MetaTrader, without going any further, you can see these questions if you right-click on the “Market Observation” window (on the left, by default) and select the “Symbols” command from the drop-down menu that appears (you have to select the asset and see its properties).
When viewing the conditions, the swap can be expressed in monetary units or in points (pips), in this way it is very necessary that you know how to calculate the value of each pip (action needed to manage well the capital and risk of each transaction).
An important issue is that depending on whether your transaction is short or long, the swap may be positive or negative. A negative swap assumes that instead of a cost, you will be credited to your trading account each day you hold the position open. This fact is common in the currency market and we will deal with it in more detail below.
Can you make money with Swaps?
As each currency is subject to a different official interest rate, there may be (and indeed there are) differences between the swaps applied to each other. The interest rate difference can be positive or negative for the trader.
The interest on the currency sold is usually charged and the interest on the currency purchased is paid. So the swap (the difference in interest rates) can be credited to the trading account. There are strategies based on making money by the difference between the interest rates of the currencies, they are known as a Carry Trade.
Trading accounts without Rollover/Swap
Swap is part of trading with Forex and CFDs, the only way to suppress this concept is by contracting a specific account for it. In effect, some brokers enable accounts without this type of cost: they are the so-called “Islamic Accounts”.
Its name is in relation to Islamic Law (Sharia Law), in which the collection of interest is prohibited. Clients who profess the Muslim religion must operate under the principles of this law, have their own financial system, and cannot receive or pay the interest represented by the swap commission.
Another different matter is trading and making a profit from the difference in the quotation. It’s just a buying game and selling financial instruments, a legitimate trade that does not run counter to Islamic finance. More and more brokers offer this type of account. Even if customers are more limited and generally less profitable for them.
However, the fact that the swap commission is not incorporated does not mean that it is ideal for the swing trader: the broker can compensate this commission for other conditions, sometimes less advantageous (there are cases in which the fees charged by the broker in compensation can be considered a disguised interest, but does not constitute a violation of Islamic Law).
Like everything else, if you want to drive a trading business forward, you should value and weigh all the variables and compare the costs of opening an Islamic Account. Otherwise, the only way to eliminate the swap in Forex is not to use leverage, but this will mean giving up CFDs. Forex trading requires vast capital.
In short, even if you have the possibility to delete it, the Forex swap can be a benefit and not a cost. In any case, you need to know it in detail to design a good trading strategy, a contingency plan, and maintain your capital and risk management (money and risk management).
Since the swap is a commission that applies to your broker, you must pay attention to the contractual documents to know the existing conditions. You can probably observe information about financial assets in more detail on the trading platform itself, including the swap. You can also contact your intermediary, through the means of customer service that provides you, to ask any of the aspects that we have discussed in this article.