Very often, newbies on forex avoid trading on a daily chart because of swaps. They are afraid of a fee that can be charged for transferring a position over the night. But swaps can be not only negative but positive as well. So let’s define what is swap and find ways not to pay it.
Swap: what is it?
A swap on Forex is a transfer of open positions overnight. The transaction, which is transferred through the night, is closed, then the swap is paid, and it is opened again. It is also a difference between the interest rates, which are parts of a trading asset.
Traders who trade long-term and medium-term strategies face swap. While trading within a day, the difference in interest rates is not charged. The size of the swap depends on the currency pairs being traded. Each currency has an interest rate set by the central bank of the country which issues it. As a result, the difference between the interest rates of currencies of different countries can be very significant.
Let’s take a look at an example. So, a trader opens a long position with USD/CAD. The actual purchase and sale of currency do not occur, but there is an interest rate on the US dollar, which is 2%, and on the Canadian dollar – 1%. In the rollover process, a trader gets a plus swap of 1%, namely, a trader buys the dollar and sells the Canadian dollar, then he gets 2%-1% = 1%. In this example, the rollover has turned out to be positive, so the value of the swap will be added at his account when a new day starts.
And if we sell USD/USD, then we buy the Canadian dollar and sell the US dollar. If the interest rate on the US dollar is 2% and the Canadian dollar is 1%, then the swap will be negative: 1%-2% = -1%.
Since the term for holding a position is unknown, the interest rate is charged on an open position at night. As a rule, this happens at 23.00, 00.00 or 01.00 – different forex brokers account swap at a different time.
Why is it so?
The reason is that in the process of buying a currency, a trader agrees that his position will be used to provide a loan to sell this currency to another trader. Therefore, when opening a long transaction, a 2% interest rate is charged, which is charged off at the time of selling. The difference between these rates is called a rollover.
The specified key rate is an annual percentage, and one should bear in mind that it is charged only on those days that are working for the exchange. To compensate for the lack of weekends overnight is tripled at night from Wednesday to Thursday. It is extremely unprofitable to leave an open position if a rollover is negative.
Swap free or Islamic accounts
But there is an opportunity to trade on Forex without swaps. Many forex brokers offer traders swap free or Islamic accounts. They got this name because, according to the rules of the Muslim world, a believer cannot be involved in usury – receiving the benefits of lending or storing money, and this is how Muslims regard the commission for the transfer of positions. So there is no such commission on Islamic accounts.
For example, the broker JustForex offers its clients, professing Islam, accounts without a swap. To transfer Cent, Mini, Standard or ECN Zero account to swap free, one should contact its support.