There are numerous terms in the Forex trading market, understanding which is very important for Forex traders. One of the terms that tend to be least understood by the majority of Forex traders around the world is the Forex trading swap. Sometimes, swaps are also known as currency swaps, or simply Forex rollover. Understanding this term can be very important for Forex traders as it can actually impact your potential profits both negatively and positively.
Simply put, a swap in Forex trading is a type of interest that is charged on the positions that traders are leaving open overnight in the Forex trading market. The swap works similarly in terms of other trading assets, such as CFDs, for example. Depending on the swap rate, as well as interest rates and the positions taken by traders, the value of the swap can be both negative and positive. This means that you either might have to pay money in the form of a swap or receive it from the broker.
However, this is not all. There is much more that traders should know about Forex trading swaps. Today, in our guide to FX trading swaps, we are going to discuss everything that Forex traders should know about how swaps work. So, follow our comprehensive guide to FX trading swaps.
Swap in Forex market – What does it stand for?
As we have already said, a swap in the Forex trading market is a type of interest charged on positions that stay open overnight. In most cases, swaps are charged on leveraged positions. The reason for this is that when you are using leverage, you are basically borrowing funds from the broker to open a position.
Every time you are opening a position in the Forex trading market, you are making trades. One is buying, and another is selling. The currency pair in the Forex market is made up of two currencies, base and quote currency. When you are buying a base currency, you are at the same time selling the quote currency. To sell one of the currencies, you are borrowing the amount to sell, which leads to the need to pay interest on the borrowed funds.
On the other hand, the currency that you are buying will earn you interest. If you are trading a currency pair that includes underlying currency with a higher interest rate than the currency you are selling, it is possible for you to actually earn a positive swap while maintaining the position open overnight.
However, although a positive swap in Forex trading sounds like a great thing, it does not happen that frequently. In most cases, Forex traders have to pay the swap because of the market conditions and different types of interest rates in the market. The swap rate that you might be required to pay depends on several factors. One of the most important things that it depends on is the instrument that you are trading. For example, the Forex swap will not be the same for the GBP/USD currency pair as it will be for EUR/USD because of numerous reasons.
What influences the swap rate in Forex?
The swap rate in the Forex trading market that you will be required to pay depends on several different factors. Understanding the underlying factors that influence the amount of money that you might be required to pay in form of a swap can be a very important thing for Forex traders.
Among many other things, the amount of swap that you might have to pay depends on the factors such as the broker you are using, the type of position that you have opened, the instrument that you are trading, the number of days your position remains open, as well as the nominal value of your position.
Understanding how to swap work is a very important as well as useful thing for traders. No matter what is your level of experience in the Forex trading market, if you are leaving your positions open overnight, it is very important to make sure that you understand how Forex trading swaps work in order to understand how avoiding swap in Forex is possible.
Because there are so many things that can influence the Forex swap rates, sometimes, Forex traders are having a hard time understanding the real meaning behind it. However, in reality, the Forex trading swap is a very straightforward concept, that can be understood easily.
Among the major factors that you should keep in mind when talking about the things that influence swap rates are the difference between the interest rate of individual currencies, the Forex broker’s commission rates, the day when the position was open, and many others.
One of the biggest things that influence the swaps in Forex is the interest rates of individual currencies, which are set by the central banks around the world. Closely following the statements of the central banks that control the currencies that you are trading might be a great idea when dealing with swaps in Forex.
The aim of swap transaction in Forex
The main purpose of currency swaps in the FOrex trading market, in most cases, is to procure loans in the Forex trading at more favorable interest rates than if borrowed from the foreign markets directly. The swaps were first introduced in the Forex trading market first by the World Bank back in 1981 and the main reason for this was obtaining Swiss francs. The currency swaps are different from interest rate swaps because they also involve principal exchanges.
On a larger scale, some institutions around the world use currency swaps to reduce their exposure to the anticipated fluctuations in the exchange rates of the currencies. A very interesting thing about Forex trading swaps is that they can be both positive and negative. This means that you actually have the chance of receiving swaps instead of paying them to the broker that you are using.
As for the time when the swaps are being charged, it depends on several things. First of all, every broker does it in their own way. In most cases, it is charged at around midnight, mostly between 11 PM and midnight. A very important thing that traders should know is that swap will also be charged for maintaining the positions open over the weekend. In addition, they are also charged even if you did not have the position open over the weekend. This happens when traders open the position on the night when the overnight swap is applied.
Interest rates & currency pairs
When you are trading Forex, you are buying one currency, while selling the other. The one that you are buying in Forex is called the base currency, and the one you are selling is called the quote currency. Every single currency in the market has its own interest rate, which is determined by the central bank that issues the currency.
The difference between the interest rates of the currencies in a pair will be either credited to the trader’s account or charged from it. The difference between the interest rates in Forex trading is called carry, while traders who leave their positions open overnight specifically to earn the difference are called carry traders.
Generally, if a currency that you are buying has a higher interest rate than the one you are selling, a swap will be credited to your account. This is something that carry traders are looking for to generate profits. However, the swaps charged or credited to the trader’s account also depend on the commission rates of the Forex broker. So, if the broker charges higher commissions, you might not be able to make profits with carry trading.
Different types of swaps in Forex trading
Depending on the Forex broker that you are using, you might have to deal with different types of swap charges in Forex market. In most cases, there are two types of Forex trading swaps in the market. They are:
- Fixed swaps
- Floating swaps
In most cases, majority of Forex brokers around the world are using floating swaps. These are regular swaps that are influenced by all the things that we have discussed in today’s guide, and are changing every moment. However, there are some people in the Forex trading market that do not want to deal with the process of thinking about the swaps that they might have to pay all the time while trading Forex.
For those, there are many Forex brokers in the market that offer fixed swaps. These fixed swaps are a great way to better plan your trading beforehand. By using fixed swaps, you can always know how much money you might have to pay for leaving your positions open overnight.
However, there are many disadvantages associated with using fixed swaps. The main one is that if you end up creating a currency pair which would result in swaps being credited to your account, you won’t receive anything. Even more, you will be required to still pay the fixed swap. While using fixed swaps, no marker conditions can have an effect on the swap that you pay. While it can be viewed as an advantage for some, others might think that it is not fair.
Choosing which swap is better for you might be a bit of a challenge. There are many things that this depends on. If you are a carry trader, using fixed swaps does not make any sense, it basically means that you are ready to lose money. On the other hand, if you are someone who is always trading with long-term positions and leaves positions open for a very long time, using fixed swaps might be a way of protection.
Because the swaps are fixed, it can help you better plan your positions and know exactly how much money you will be paying for service like leaving your position open overnight.
Avoiding swap loss in Forex trading
It should not come as a surprise that there are many people in the Forex trading market who do not want to pay brokers money for holding their position open overnight. In addition, there are others who can’t participate in paying swaps because of their religious beliefs.
For example, according to the Sharia law of the Quran, people following the beliefs of Islam are restricted from receiving or paying any type of interest rate. For these people, paying or receiving swaps means that they are going against their own faith. Still, there are many Muslim Forex traders in the market. So, how are they doing it?
The answer to this question is the swap-free account. There are numerous Forex brokers around the world that offer traders Islamic accounts, which are also known as swap-free accounts because their users are not required to pay swaps. This way, Muslim traders can invest in Forex without having to go against their religious beliefs.
But, this is not the only way to avoid paying swaps while trading Forex. Another very popular thing that a lot of traders are doing is that they are simply trading during the day before the market closes. This way, they do not have to leave their positions open overnight, and since the positions are not open overnight, there are no swaps charged or credited to their account.
On the other hand, there are others who simply want to avoid negative swaps, while they are very much interested in receiving positive swaps. This is possible as well, however, might be a little challenging thing to do. To receive swaps instead of paying them, a Forex trader will have to dedicate a lot of time to market analysis and following the statements of central banks of different countries to find the perfect currency pairs.
Final thoughts on swap meaning in Forex
In the world of Forex trading, swaps are charged when you leave your positions open overnight. Swaps can be positive as well as negative depending on the interest rate of the currencies that you are trading. If the swap is positive, it will be credited to your account, however, if it is negative, you will be required to pay it.
There are two major types of swaps available in the market. They are fixed swaps and floating swaps. Fixed swaps stay the same at all times while floating swaps are changing very frequently according to the interest rates and several other factors that we have already discussed in our guide.
Frequently Asked Questions on Forex swap rates
What is a swap in Forex trading?
In the Forex trading market, a swap, also called a rollover fee, is charged when traders leave their positions open overnight. Simply put, a Forex trading swap is a difference between the interest rates of the currencies that you are trading. It is calculated according to the position traders take and depends on several factors, including interest rates, broker fees, and so on.
What are the types of Forex swaps?
There are two major Forex trading swap types in the market. They are fixed swaps and floating swaps. Fixed swaps always stay the same and are pre-determined by the brokers. As for the floating swaps, they change according to the market conditions and the interest rates set by the central banks that issue the currencies.
