What Are Currency Swap Trades in Forex

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Many traders are afraid of such a phenomenon as a Forex swap because they believe this is a special commission of a broker, which will be withheld if the transaction is transferred to the next day. This is true in many forex broker trading online cases, but the swap can be both positive and negative. The funds can be debited and, conversely, credited to the user’s deposit.

What Is a Swap, and Where Can I Find It?

Translated from English, the word “swap” literally means “replacement.” If we talk about stock trading, a Forex swap is an operation to accrue or withdraw funds from a trader’s deposit in cases where he planned to postpone the transaction to the next day.

Thus, a Forex swap is observed only in cases where the user opens positions for at least 2 days. Funds are debited or credited at 17:00 New York time.

A trader may encounter a swap operation only when he uses medium-term and long-term trading strategies. In other cases (trading for several minutes or hours), there are no accruals or withdrawals of additional funds. Thus, the swap is associated only with the transfer of the position to the next day. The transfer is sometimes called an incorrect swap.

The swap value can always be found in your trading terminal. It is reflected as soon as the user opens a position. You can see a specific number at the bottom of the terminal – in the same table that shows

  • The opening price
  • Commission
  • Profit, or
  • Loss

In this case, profit is always reflected, considering this difference. As for broker sites, the values ​​are presented in tabular form in the corresponding section.

You can also use the free swap calculator. It helps to quickly calculate the difference between certain assets to predict possible risks. To use the calculator, you must enter the currency pair, account type, and volume in lots. The system calculates differences for both short and long positions.

 

Positive and Negative Swap: Calculation Examples

There are often questions about the reasons for holding (or crediting) additional funds to the deposit. Traders often believe this is an additional brokerage commission, although this is incorrect. The reasons for the swap are purely economic, not commercial. The fact is that each country sets its interest rate, which determines the cost of loans, interest on deposits, and other important economic indicators.

  • For example, today, the rates in some developed countries are as follows:
  • US 1.75%;
  • European Union 0.00%
  • UK 0.5%;
  • Japan -0.1% (negative rate).

A trader opens a position to buy the GBP/JPY pair, they do not receive the currency in cash. At the moment, in Britain (the currency of the pound sterling), the rate is 0.5%, and in Japan (the currency of the yen) the negative rate is -0.1%; then if the position is transferred to the next day, you need to calculate the difference using the most straightforward formula:

0.5 – (-0.1) = 0.5 + 0.1 = 0.6%.

The result is a positive 0.6% Forex swap. This annual rate must be paid using the currency (in terms of 1 day). Accordingly, a positive swap is like a loan that constantly accrues interest.

In the opposite case, when the user, on the contrary, sells GBP / JPY, you also need to subtract the difference in rates, but now the yen will be in the first place, and the pound sterling will be in the second, so the formula is as follows:

-0.1 – 0.5 = -0.6%

The result is a negative swap, i.e. now this amount per annum (in terms of 1 day) is not paid by the trader, but on the contrary, the broker credits him to the account. Thus, the user needs to monitor the positive difference constantly.

If, for a day, the amount is not noticeable, then in a few weeks or even more months, the amount of the commission will be significant. Conversely, negative values ​​provide an opportunity to earn. Therefore, it is essential to understand how to calculate a Forex swap to minimize losses and even get some profit.

The reason for withholding or crediting a small amount of interest per annum is related to the rates of various currencies established in the respective countries. If a trader opens a particular position, he does not buy or sell cash, but uses the rate only to make a profit based on speculative activities. That’s why:

When selling a currency, the merchant pays interest for actually using borrowed funds (similar to how interest is paid for using a bank loan).

When buying a currency, the user agrees that his position will be used by other players who sell the currency at the same interest rate.

Therefore, when buying, the trader is forced to pay a percentage for the use, and when selling, the rate for providing a loan.

It is important to note that the swap is always calculated as the difference in interest. However, this value is tripled if the trader holds the position from Wednesday to Thursday. The reason is that on Saturday and Sunday, the banks are closed, but on these 2 days, the players still use the money. They are charged in the middle of the week — i.e., on Thursday night.

Swap Classification

There are several types of swaps – both related to the Forex market and related to other financial areas. The difference described above applies to currency swaps, since it only arises because each country sets its own interest rate. Therefore, some differences in percentages will be inevitable. In turn, the currency swap is divided into 3 types:

  • Standard (the first transaction occurs as a spot, the second – as a forward);
  • Forward — on the contrary, first forward, then spot;
  • Short (one-day) — transactions that are carried out within 1 day. This is the most popular variety, allowing you to make a profit quickly.

There are other varieties:

  • Bond — a type of transaction in which it is supposed to sell some bonds at the same time and immediately buy others.
  • Stock is a transaction in which one company acquires another company with its shares.
  • Credit default — an agreement a company undertakes to repay a loan taken by a particular company from a bank. It serves as insurance against possible ruin and the announcement of the company’s default (inability to fulfill its financial obligations).
  • Interest — a transaction in which one company undertakes to pay the other party a specific interest on a predetermined amount. In return, this party will receive the second payment, which is calculated not at a fixed, but at a floating currency rate.

How to Make Money on Exchange Transactions

Finally, the most crucial question is whether earning on the difference in interest is possible. The theory does not rule this out because it is not uncommon for situations to arise where a positive swap results in a small amount being credited to a trader’s account.

Therefore, for a certain period, you can earn quite a lot of money if you carefully consider your trading strategy.

The strategy of earning on the difference appeared a long time ago. It’s called Carry Trade. The basic principle is that you need to achieve a sizeable positive swap. To do this, you need to find a currency pair for which, at the moment, the base currency has the highest rate, and the quote currency (written below the line) has the lowest. For example, for USD, the rate is 1.75%, and for JPY, the rate is -0.1%. Therefore, such a pair is theoretically suitable for potential profit.

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