The Forex Swaps and Why You Should Not be Afraid of it

Hello, dear readers! Very often, beginners in the Forex market do not trade on the daily charts because of the swaps. They are frightened by the realization that for holding a position longer than a day they will pay a charge. But swaps may be positive. So what is a swap? Is it excessive loss or the opportunity for additional income? Is it possible not to pay the swap? The answers to these questions and more are below.

 

What is swap in Forex

So, what is swap? This is the difference in interest rates on loans between two currencies that is deposited or charged to the account when you  rollover a trading position for the next day. Moreover the swap can be both positive and negative.

Why do we pay for the rollover of the position for the next day?

First, we do not want to receive physical delivery of the currency. Let’s say we bought EUR/USD. Our task is not to get Euros and sell dollars. We are only interested in some sort of speculation with currency pair. We wonder would the price go up or down depending on our position. We do not want to receive physical delivery of n-th number of currency. Since we’re just speculating, but we don’t need real money, our position, our order is transferred for the next day without delivery of real currency. And  swap is charged while this transfer .

Let’s look at the example. Let’s say we buy EUR/USD. In fact we buy euros and sell US dollars. If the interest rate on Euro is 2%, and the dollar is 1%, then when you rollover (transfer the positions to the next day), you will get positive swap about 1%.

2% — 1% = 1%

And if we sell EUR/USD, then we buy dollars and sell Euros. If the interest rate on Euro is 2%, and  the interest rate on dollar is 1%, then swap will be negative and will be approximately 1%

1% — 2% = -1%

Why is this interest charged?

When we sell dollar, as we don’t have it initially, we take it on loan. And accordingly we pay interest rate of 1% for a credit if we keep our position in the transfer to the next day. If we sell what we have not, we pay interest for the use of borrowed funds.

Why do we get a certain percentage depending on interest rates? Why should we get extra payment when we buy any currency?

The thing is, when we buy for Euro, for example, we agree that our position can be used to provide credit for selling Euro for other traders. Thus, when we buy something, we get the interest rate. And when we sell something, we pay interest for the loan. Since we were allowed to sell what we had not. And this very difference in interest rates is called Swap. Now I hope you understand why it is.

Where can you find Swap in the terminal?

In the terminal swap is reflected when you open a position. And if you hold it at the time of the rollover to the next day, that is usually more than one day, you can see swap where the profit, or loss on open positions, the price of opening or closing is shown. There you will find Swap column. It can be both positive and negative. And depending on how many times swap was accrued or written off, the profit will also be modified in the light of the swap.

Note that a triple swap is charged or credited in the night from Wednesday to Thursday. Because the banks are closed on weekends, and we still have to pay or receive rate on loan. For this reason, a triple swap is charged. This is to remember and pay attention.

As I mentioned, the swaps are accrued at 17:00 New York time (USA). Or at 0:00 according the time of the trading terminal. It is 1:00 AM Moscow time.

Where can I find information about Swaps?

Swap data are given on the websites of your brokers. For example, Roboforex gives this information in the section: “Conditions – Contract Specifications”

You can see a list of currency pairs and data on swaps below:

The swaps are for short positions and long positions. If the value is minus, then this swap is negative. And this indication is given for all currencies.

Please note that the interest rates of Central Banks are different, for different currency pairs spreads can be both insignificant and highly visible.

As for example,  for USD/MXN:

Swaps for short positions has almost 8 pips in plus. But swaps for long positions has -16,3 pips, but in the negative. This can be very important, especially if you hold the position for a week.

The swap can be viewed in the terminal by moving the mouse on the window “market overview”. Click the right mouse button, select “symbols” and select the required symbol.

Swaps for long and short positions will be listed here. In the photo below you can see that  swaps for GBP/USD for long positions are negative and swaps for short positions are negative also.

There is a logical question. Do we need to pay attention to the swaps? One of the obstacles that is in the way of the beginners who want to trade on the daily charts, that is to open positions once a day and analyze positions on the charts D1, where one candle is one day, are swaps.

Beginners think that “since I’m going to pay swaps for holding the position for the next day, then I’m going to suffer some significant losses”. This opinion is not true. Of course if you trade the major currency pairs. If you don’t trade some exotic currency pairs, swaps can be ignored.

Personally I trade on the daily charts and do not pay attention to swaps. As lending rates of the Central Banks of the largest countries are very low, swaps with plus or with minus do not have any significant load. Because, if we take the swap on the same EUR/USD pair, its value is very small and it makes no sense to pay attention to it. Even if you kept the position for 10 days, 5 pips could be accrued to you. As the targets on the daily charts are set at 100 pips, we understand that the swap is negligible.

If you do not keep open positions more than 2 weeks, then you can not pay attention to the swaps. But if you are a positional trader and belong rather to the investors who keep open positions for several months and possibly a year or more, then you should pay attention to the swaps. Because if you keep the position for a year, impressive amount can be accrued during this period of time.

How should you act if you trade while keeping open position for a month or more?

In this case, you will need a swap free account. Nowadays almost all brokers provide the opportunity to create such accounts. When you open it you just need to specify that you want a swap free account. But you should remember that you will be charged a higher commission for the position. The broker has to compensate his losses.

So if you don’t hold positions for longer than a month, then you you should not pay attention to the swaps. Of course if you trade not exotic currency pairs but major pairs.

If you belong to the investors and keep open positions for several months, then you should pay attention to the swap free accounts.

For those who want to delve into the question of swaps, you can go online to see the table of interest rates of the world Central Banks. Enter the phrase into a search engine. And you will see the sites that have this information:

For example, I entered the site FXSTREET.

The table contains the data of the Central Banks of Europe, Australia, Canada, Indonesia, etc. All the data is there. You can see the current bid, the previous value and the date on changing of interest rates.

 

Carry Trading

There are also strategies for working with swaps. In general it is called Carry Trade. The essence of Carry Trade is to keep the position as long as possible and get positive swap. Practically, the strategy is aimed to make the swap, but not on the price movement in the direction of our position.

Such strategies are applied to those currencies that have a significant positive swap. It is useless to apply this strategy to the EUR/USD pair. Since swaps are very small. You should choose pairs with high swaps for Carry Trade.

Again, you can find such pairs on the page contract specifications:

 

Here for example is USD/ZAR pair. Its swaps for long positions are negative. We are not interested in it. But the swap for short positions is 9.48 points. Accordingly, if we will keep the position for long, then we can make good money with these swaps. But this pair has a great spread of 41.48 pips, for this reason it is not interesting to us. Commission for opening of this position is too high.

Let’s look at the other pairs with high positive swaps.

 

EUR/NZD. Short positions swap is 1.04 pips. But the spread is small and is 3,76. It is a plus for us, as it will not interfere with opening of positions. Does it make sense for us just open a short position and keep it for a long time? What if the currency pair global trend is uptrend? In this case, we are not interested to keep short positions for a long time. We will lose money from rising prices in the long run. So you need to find a pair with a high positive swap and its long-term global trend that lasts for years should move in the direction of the position we are going to trade.

Let’s look at EUR/NZD. Does it have a global trend down?

This pair has no bear trend on the daily chart in general. But if you look ealier at this daily chart, there was an increased tendency down.

So basically you can use this currency pair for Carry Trade. We will open a short position and keep it for a long time, for a month or even a year or more. Of course we will not just enter the position, but I hope that this example has explained to you the essence of the Carry Trade. We will talk about it in detail in one of the following tutorials on our website.

Take care, Michael

forextraderportal.com