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What is a Swap? Forex Basics

Forex Educational Video Series

What is a Swap in Forex trading?

A swap in forex refers to the interest that you either earn or pay for a trade that you keep open overnight. There are two types of swaps: Swap long (used for keeping long positions open overnight) and Swap short (used for keeping short positions open overnight). They are expressed in pips per lot, and vary depending on the financial instrument you’re trading. In FXTM, you can see what swaps apply to which instrument on the Contract Specifications page. In the case of EURUSD, for instance, Swap short is 0.01 and Swap long is -0.48. Let’s use the EURUSD as an example to show how swaps work: if a trader shorts on EURUSD by 1 standard lot on a Thursday, and keeps the position open overnight, closing it on Friday, the Swap short is calculated as follows: 100 000 (the size of 1 Standard Lot) x (0.01 x 0.0001 pip) = $0.10. Meaning he earns $0.10 of interest. If the same trader goes long on EURUSD by 1 standard lot on Thursday, and only closes his position on the following Tuesday, the swap long formula would be: 100 000 x (-0.48 X 0.0001 pip) = -$4.8 per night. Meaning he pays $4.8 of interest per night. Since he’s keeping his position open for three nights, that would be a total interest of $14.4 (-4.8 X 3) that he would need to pay.

Now let’s say the same position is only close the following Thursday. That would be a full week, which means 7 nights (5 week nights + 2 extra added for the weekend). This means he would pay $33.6 (7 X -4.8) of interest. It’s important to remember that, as a general rule, weekend swaps (2 nights) are always applied to any positions kept open over Wednesday. If a trader were to short EURUSD on a Monday with 1 Standard lot, and close his position on Thursday, the position would theoretically be open for only 3 nights, but at midnight on Wednesday, the weekend swaps would be applied. This would raise the total number of nights to 5. In this case, the trader earns $0.10 a night (100 000 X 0.000001) so he would earn a total of $0.50 ($0.10 X 5) for the total duration of his open position.

What is the purpose of a Swap?

Trading with leverage means borrowing money for forex positions. When a position is left open for more than a day, interest must be paid on that loan. Swaps are therefore essentially interest rates for leveraged funds.

How can I potentially make money on Swaps in forex?

The most popular way to profit from swap rates is the Carry Trade. You buy a currency with a high interest rate while selling a currency with a low interest rate, earning on the net interest of the difference.

When are forex Swaps charged?

The exact moment this happen will depend on your broker, but it’s usually between 11pm and midnight.

How long can I keep a forex position open?

As long as you like. Forex traders who keep positions open for days or weeks are called Swing Traders. Those who keep positions open for months or even years are called Position Traders.

What if I want to trade forex without Swaps?

If you close your positions before the end of the trading day – known as the rollover point — you’ll neither owe nor earn any swap charge. This is called Intraday Trading.

What determines the interest rate behind a forex Swap?

The interest rates for the individual currencies are based on decisions taken by their central banks. The amount credited or charged to the trader can also depend on:

  • The difference between the interest rates of currencies
  • The forex broker’s commission rates
  • The day when you open the position
  • Price movements of the currencies

What is a negative currency Swap?

This occurs when you hold a position for a currency that has higher interest rate compared to the bought currency.

Why do forex Swap rates triple for positions held over a Wednesday?

Trades take two days to settle, so those placed on Wednesday will settle on Friday. And while the forex market is closed at weekends, the banks still charge interest. The triple fee covers rates for the weekend.

Where can I see Swap rates of forex currency pairs?

You can find the current swap rates in the MetaTrader trading platform. They’re updated constantly to reflect the prices you’d be charged that night.

To view swap rates in MetaTrader 4 and 5:
  1. Click ‘View’ > ‘Market Watch’ > ‘Symbols’
  2. Select the currency pair
  3. Select ‘Properties’ on MT4, or ‘Specification’ on MT5

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice.

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