What is the Forex Swap and How Does it Affect My Trading?
Possibly one of the least understood terms in Forex trading is the "Forex swap", also known as the Currency Swap or the Forex Rollover. It's important to understand how the Forex swap works when trading, as it can impact your potential profits either positively or negatively.
You should understand the amount of the Forex swap and how it is calculated. Understanding this will allow you to organise your trading strategy and money management to account for all the charges incurred by your trading.
The Forex Swap Explained
The Forex swap, or Forex rollover, is a type of interest charged on positions held overnight on the Forex market. A similar swap is also charged on Contracts For Difference (CFDs). The charge is applied to the nominal value of an open trading position overnight.
Depending on the swap rate and the position taken on the trade, the swap value can be either negative or positive. In other words, you will either have to pay a fee or you will be paid a fee for holding your position overnight.
Swap rates are charged when trading on leverage. The reason for this being that when you open a leveraged position, you are essentially borrowing funds to open the position.
In the Forex market, for example, every time you open a position you are effectively making two trades, buying one currency in the pair and selling the other. In order to sell one of the currencies you are effectively borrowing that amount to sell, which leads to the need to pay interest on the amount borrowed. The currency you are buying, however, will earn you interest.
If the underlying interest rate for the purchased currency is higher than the currency you are selling, it is possible that you will earn interest for holding the position overnight. However, due to other considerations, such as a broker's mark up, it is likely that, regardless of the position opened (purchase or sell), you will be charged interest.
Therefore, the swap rate depends on the market and subsequent instrument that you trade. For example, the Forex swap will not be the same amount for EUR/USD as it will be for USD/CAD.
The swap fee varies depending on:
- The online broker
- The type of position: purchase or sale
- The instrument
- The number of days the position is open
- The nominal value of the position
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When are Swaps Charged?
The exact moment at which the swap is charged to your trading account will depend on your broker. For most brokers, it is charged at around midnight, most commonly between 23:00 - 00:00 server time.
Something which is not always known, is that sometimes the swap will be charged for maintaining a position over the weekend, even when it is not held over the weekend. To compensate for the fact that the markets are closed over the weekend, the weekend swap is charged on either Fridays or Wednesdays, depending on the specific market.
In other words, if you hold your position overnight on the day that weekend swaps are applied, three times the normal swap will be charged on your trade.
To confirm when exactly your broker makes a swap charge on your trading account, it is best to either look at the contract specifications for the instrument you are trading, or to ask your broker directly.
How Can You Calculate the Swap Rate?
Forex swap calculations can sometimes be fairly complicated, depending on your broker. At Admirals, you can use our trading calculator to easily find out the swap rate for your trade, as well as other important information.
Depicted: The Admirals Trading Calculator
The swap rate varies depending on which broker you use, you can find out how much it is from the contract specification page for the instrument you are trading.
On the Admirals contract specification pages, the Forex swap charge is shown in relation to the pip value of your position.
Depicted: Admirals - GBP/USD Contract Specification
In the trading calculator, we saw that the pip value for the example position was 7.66 GBP. Multiplying that by -0.430 gives us our long (purchase) swap value of -3.29 GBP and multiplying it by -0.280 gives our short (sell) swap value of -2.14 GBP.
It is possible that a broker may show you their swap rate as a daily or annual percentage, in which case you will need to calculate the swap value based on the nominal value of your position.
If it is shown as an annual percentage, you will need to calculate the percentage value of your nominal position and then divide by 365 to arrive at the daily figure.
As we have already noted, the amount of the swap depends on which financial instrument you are trading. It can also be a positive or negative rate depending on the position you take. Although, in the example above you will note that both figures were negative, meaning that regardless of the position taken, the trader would have been charged for holding the position overnight.
A Forex swap rate depends largely on the underlying interest rates for the currencies in the pair you are trading. There is also a custody fee incorporated into swap rates. If the costs of holding an asset are high (such as with commodities) negative swaps will usually be observed for both long and short positions.
Swap Rates in MetaTrader 5
Before you can view the swap rates in MetaTrader 5, you will first have to download it, which you can do for free by clicking the banner below!
You can check swap rates in your MetaTrader trading platform. In both the MetaTrader 4 (MT4) and MetaTrader 5 (MT5) trading platforms, you can see the swap of an open position under the "Swap" column of the "Trade" tab, as illustrated below.
Source: Admirals MetaTrader 5
It can also be found before opening a position by right clicking the instrument you plan on trading in the "Market Watch" window. Simply click "Specification" from the subsequent drop down and you will be shown a dialogue box with information regarding the instrument, including the swap values.
Depicted: Admirals MetaTrader 5 - GBPUSD Specifications
Long Term and Short Term Trading
What will the impact of the Forex swap be on long term and short term trading?
The swap or rollover rate can impact the profitability of your trades. For short term traders, the swap rate will only have a small impact, or perhaps in the case of day traders, no impact, on profitability.
Long term traders, however, will need to pay more attention. The longer a position is held open, the more impact the swap rate will have on your balance. It adds up every day.
If you are a long term trader dealing with high volume orders, it might be in your interest to avoid the Forex swap. This can be done by either trading directly, without leverage, or by using a swap free Forex trading account.
Swap Free Trading Accounts
Do swap free trading accounts exist? Yes, they do. Islamic accounts do not have Forex swaps.
In Islamic finance, lenders are not allowed to charge interest. Islamic trading accounts may have other trading fees, such as a weekly fee charged at the beginning of the transaction, or they may have no additional fees at all.
Admirals has Islamic accounts, you can read more about them here!
Futures Rollover - A Special Case
In the futures markets, there are no swap fees. Therefore, you can trade futures for indices such as the FTSE 100 or the DAX 30 without having to pay nightly fees.
At the end of the futures contract, some online brokers offer to "roll over" your current contract into the next futures contract. This can be an interesting proposition, as it allows you, for example, to trade without swap fees and renew your position for up to a year.
This type of futures contract rollover is not without risk. As the prices of different futures contracts differ, by rolling over into the next contract, you may be unwittingly increasing your costs. Therefore, you should clarify contract costs before deciding whether to roll over into other contracts.
Currency Swap Strategy
The most well known Forex swap strategy is that of a "Carry Trade".
So, what is a carry trade? A carry trade involves making a trade where you borrow in a currency with a low interest rate and invest in a currency with a higher interest rate.
The traditional example is to borrow in Japanese Yen and invest in Australian or New Zealand Dollars.
The carry trade is a long term trading strategy and it is obviously important to choose currencies that have a significant difference in exchange rate.
The inherent risk with this strategy is that an unexpected market movement could wipe out any profit made from collecting the daily swap.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.