Swap plays a vital role in a trading strategy. However, understanding Swap, especially for a new trader, can be pretty confusing. In Forex Trading, a Swap is considered an interest that is either earned or paid to keep trade open overnight.
Swap charges on the open trades aimed at buying or selling foreign currencies are considered an exchange of currencies. It only applies to the trades that are middle-term or long-term.
Swap Role in Forex Trading
- What is the point of Swap?
Swap can be categorized into two types, Short Swap & long Swap. Short Swap keeps short positions overnight, while Long Swap helps keep long positions open overnight. When your position in trading is open for more than one day, the interest on this particular trade must be paid on loan. Leverage in trading means borrowing money to improve forex position. It makes Swaps essentially interest rates to leverage funds.
- How is the interest rate of Forex Swap determined?
The interest rate of each Swap in forex trading can vary depending upon some critical trading factors. The Swap interest reflects the difference between the interest rates of different currencies that are being traded, your position on the day opening, Forex Broker’s commission rates & fluctuation in the price of the currencies.
An unfavorable currency swap can also affect your account if the position of the currency that you are holding has a higher interest rate compared to the bought currency.
Remember that Swap rates triple for the positions held over a Wednesday because even if the forex market is closed at weekends, the banks still charge interest fees. That is why the Swap rate triples on Wednesday trades to cover rates for the weekend.
- Can I trade without Swap?
If Swap earned or paid interest fee is bothering, and you want to cancel out anything Swap related to forex trading. Then the only way is to close your position before the trading day ends. Also known as rollover point, you will neither be charged nor earn any swap if you end all of your trades. This process is also called Intraday Trading.
- Is there money to be made on Swap?
Making money by using Swap is challenging but not impossible. The traders who make money on swap fee that is either debited or credited are known as Carry Traders, and they generally make a profit from Swap if the prices stand still for a long time.
The process behind carry trades is to buy a currency with a high-interest rate and sell another currency with a low-interest rate. This profit is generated from quote fluctuation and interest rate differences in currencies.
The profit from this is long-term, which means you can keep the trade positions open for weeks, months, and even years. Just make sure that this method is not sustainable during global economic crises.
This detailed guide covers all the things related to Swap in Forex trading. Understanding Swap is essential for getting the best out of your trade.