The Forex Swap Explained
Possibly one of the least understood terms in Forex and CFD trading is the Forex swap, or CFD swap. It's important to know how the Forex swap fee works when trading, as it can impact your potential profits. Consequently, understanding the swap in Forex will allow you to organise your trading strategy and money management to account for all the charges incurred by your trading.
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What Is Swap in Forex?
The Forex swap, sometimes called the Forex rollover rate, is a type of interest charged on positions held overnight in the Forex market and 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 fees are charged when trading on leverage. The reason for this being that when you open a leveraged position, you are essentially borrowing funds to place the trade.
In the Forex market every time you open a position you are essentially 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, resulting in an interest charge 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 (buy or sell), you will be charged interest.
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What Impacts the Forex and CFD Swap
The swap rate depends on the market and the specific instrument which you are trading. For example, the Forex swap will not be the same for EUR/USD as it will be for USD/CAD.
The swap fee will vary depending on the:
- Type of position (purchase or sale)
- Number of days the position is open
- Nominal value of the position
When Are Swap Fees 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.
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 and the broker. 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 to Calculate Swap in Forex
Forex swap calculations can be fairly complicated depending on your broker. At Admirals, you can use our trading calculator to estimate the swap fees for your trade, as well as other important information.
With Admirals, you can also find the Forex swap charge in relation to the pip value of your position in the Contract Specification section of our website.
In the trading calculator, we saw that the pip value for the example position was 8.17 GBP. Multiplying that by -0.488 gives us our long (purchase) swap value of -3.99 GBP and multiplying it by -0.299 gives our short (sell) swap value of –2.44 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.
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. However, 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
You can easily check swap rates in both the MetaTrader 4 and MetaTrader 5 trading platforms. In both platforms, you can find the swap of an open position under the "Swap" column of the "Trade" tab, as illustrated below.
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.
Long-Term and Short-Term Trading
The Forex and CFD swap can impact the profitability of your trades. For short term traders, the swap rate will only have a small impact on profitability. In the case of day traders and scalpers, the swap will potentially have no impact whatsoever.
Long term traders, however, will need to pay more attention. As the swap fee is calculated every day, the longer a position is held open, the more impact it will have on your balance. It may not seem like much on a day to day basis, but it can add up over time.
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 account.
Do swap free Forex accounts exist? Yes, they do. For example, Islamic accounts do not have Forex swaps.
In Islamic finance, lenders are not allowed to charge interest. Whilst they don’t charge a Forex swap, Islamic trading accounts usually 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.
Forex Swap Strategy
The most well-known Forex swap strategy is the Carry Trade. This 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, with the aim of earning interest on your position via the Forex swap.
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.
To learn more about carry trading, check out our webinar below on the topic:
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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.