Forex or the foreign exchange market has been one of the most popular markets for trading globally. It involves the exchange of currencies from different countries in the world, and traders make profits by buying and selling currencies at the right time. One of the common terms that traders come across in forex trading is swap-free. In simple terms, swap-free refers to a type of trading account that does not charge or pay interest on overnight positions.
The concept of swap-free accounts originated from the Islamic finance principles, which prohibit the charging or paying of interest on financial transactions. Therefore, swap-free accounts are also known as Islamic accounts or Shariah-compliant accounts. In Islamic finance, the concept of interest is replaced with the concept of profit and loss sharing, which is more ethical and fair. Swap-free accounts are designed to cater to the needs of Muslim traders who wish to participate in forex trading without violating their religious beliefs.
In forex trading, a swap is a fee charged by the broker for holding a position overnight. It is also known as rollover or overnight financing. The swap fee is calculated based on the difference in interest rates between the currencies involved in the trade. If the interest rate of the currency being bought is higher than that of the currency being sold, the trader will receive a positive swap, and if the interest rate of the currency being sold is higher, the trader will have to pay a negative swap. Swap fees can significantly affect a trader’s profits, especially if they hold positions for an extended period.
Swap-free accounts, on the other hand, do not charge or pay any interest on overnight positions. Instead, swap-free accounts charge a commission on trades, which is usually higher than the regular account’s spread. The commission charged compensates the broker for the interest they would have earned from the swap fees. The commission charged on swap-free accounts is fixed and does not depend on the length of time a trader holds a position. Therefore, traders can hold their positions for as long as they want without incurring any additional fees.
Swap-free accounts are not only beneficial to Muslim traders but also to non-Muslim traders who wish to avoid swap fees. For instance, traders who hold positions for an extended period, such as swing traders or long-term investors, can benefit from swap-free accounts as they do not have to pay any interest on their positions. Furthermore, traders who trade in currencies with high-interest rates can also benefit from swap-free accounts as they can avoid paying high swap fees.
In conclusion, swap-free accounts are a type of trading account that does not charge or pay any interest on overnight positions. They are also known as Islamic accounts or Shariah-compliant accounts, and they are designed to cater to the needs of Muslim traders who wish to participate in forex trading without violating their religious beliefs. Swap-free accounts charge a commission on trades instead of swap fees, which makes them an ideal choice for traders who hold positions for an extended period or trade in high-interest rate currencies. Therefore, traders should consider swap-free accounts when choosing a trading account that suits their needs.
