Traders can see in statements overnight rollover fees. Sometimes, depending on the main difference in the interest rates between the currencies in a pair, this fee will be paid to you.
But, what is the meaning of swap in forex trading?
What is a forex swap fee?
Forex swap fee or forex rollover represents the interest traders can earn or pay on positions held overnight on the Forex market. A swap long fee will be applied when traders keep long positions open overnight, and swap short will be applied when traders keep short positions open overnight.
The swap fee can be applied if traders hold the positions at the daily rollover point, 00:00 server time, or “tomorrow next.”
You may be aware that there is money to be made in forex, but you may not know how to go about it as a beginner. You may have come across terms like rollover fee or swap in forex trading. But it is quite possible that you may not be fully aware of the same because of a lack of information and knowledge. Further, if you are one of those who are into scaling, you may have never come across such types of fees. Nonetheless, it would not be a bad idea for you to have a reasonably good understanding that could answer the question of how to earn a swap in forex. We are sure the following few lines may help readers find the correct answer to the above question. It will help them to have a more recent and more informed perspective about forex trading. It will perhaps help them succeed in forex trading in the medium and long-term view.
How Does It Work?
If traders are short EUR/USD overnight, traders will be charged interest for borrowing EUR, and traders will receive interest for lending USD.
If traders are long EUR/USD overnight, traders will be charged interest for borrowing USD, and traders will receive interest for lending EUR.
Positive and negative swaps in forex
Positive Swaps in forex represent a positive difference between the interest charged and received, and then traders receive the difference in the trading account.
Negative Swaps in forex represent a negative difference between the interest charged and received, and then the difference will be taken out from the trading account.
Since swap is the difference in interest, it can work both ways. You could either be paid for the difference in interest rates for such overnight trading. On the other hand, you could be charged an interest differential amount. This would be dependent on the currency pair that you are trading during such a swap situation. When you decide to trade on margin, you will end up making money on the interest. This will be for long positions after squaring off the interest payable on the various short trades. When you decide to net a profit, you will be termed a “carry” position. On the other hand, if you have decided to take only trades that will lead to a positive interest as far as your account is concerned, you are considered a carry trader.
What is swap long and short forex?
Swap long and swap short are swap fee types. A swap long fee will be applied when traders keep long positions open overnight, and swap short will be applied when traders keep short positions open overnight.
Swap rate calculation forex example
To calculate the swap rate for 1 lot and 1.3 price level in forex, you need to do the following steps:
Swap rate = (Contract x [Interest rate differential. + Broker’s mark-up] /100) x (Price/Number of. days per year)
Swap Short = (100,000 x [0.75 + 0.25] /100) x (1.3000/365)
Swap Short = USD 3.56.
Hotforex swap value is changing every day. However, Hotforex offers a special Hotforex swap calculator where all traders can calculate swaps for their accounts.
Hotforex Swap short rate is for example 2 points
Number of weekend nights the trade is open = 2
1 lot has 100,000 units
Minimum price increment for 5 digit brokers (value of 1 point) is 0.00001
Swap fee = 100,000 * 2 * 2 * 0.00001 = 4.00 USD debited on your account
Things To Bear In Mind
When you are into swap trading in forex trading, you need not worry too much about losses. However, this will be possible only when you keep your trade as short as possible. It would be advisable not to keep the trade longer than a week or ideally for around five days. It would also not be good to keep the trade open during the weekend because violent volatilities often happen when trading opens after the weekend. Successful traders who use the swap mode try and use this facility twice a week, and they believe that it could give more profits. Hazarding guesswork during the beginning of the next week is best avoided.
Islamic accounts usually do not offer rollover fees; they are swap-free. Usually, this is because of religious purposes because swap is interesting, and every kind of loan is prohibited (haram) in the Islamic world.
Bounce Back Strategy
Bounce back strategy could also be used when using swap as an alternative. Many successful traders have used it on Monday and Tuesdays. However, the bounce-back strategy should not be kept open for long periods of time, and it should be closed by Friday mornings. It would be better to get out the swap option by Friday, even if there is a loss situation. Keeping it open till Monday next should be avoided as much as possible. You have to remember that if the carry forward is positive, you stand to gain money into your account. If it is negative, you have to square off the difference, which will be taken from your account. This is auto-calculated as far as brokers are concerned.
Are The Fees High?
The swap fee for major currencies is not very high, and in fact, the fee for gold in such situations could be much higher. However, it could vary a lot, and as somebody who is just getting started, you should not bother too much about the possible variations. However, if you are serious about it and would like to get into long swing trades, and if you are keen on holding onto the trades for a few weeks at one go, you must put effort into research. You must visit a few sites and use calculators to be updated about the possible outcomes using the swap option.
Is It Possible To Avoid Swap Fees In Forex?
Many new traders often ask if it is possible to avoid swap fess in a forex transaction. To get an answer to this, you need to look at it from another angle. You could look for trading in trends that are beneficial to you, even if it means carrying your account forward to the next round. You could choose to trade intraday if you close your trades latest by 5 PM EST. This is the time when the New York Session comes to an end. This is considered to be the easiest way to do things and to avoid paying the swap fee. It works fine, but it might require some bit of practice and handholding before you can do it perfectly.
The Final Word
It is evident from the above that there are some pros and cons of using the swap mode of forex transaction by paying the requisite fees. Though there are ways to avoid them, you should not bother about it until you are comfortable with the demo versions. However, it would help if you did not allow swap trading to take over swing trading completely. It all depends on your style of trading. If you can do it properly, it is obvious that your wins will be much more than the fees you may end up paying. You also can have the luxury of looking at many brokers if you believe that your spread and other expenses are smaller than other brokers. You should know how to spread the risk across. Ideally, it would be better to trade longer than a day, with around 10 to 20% of the entire trading volume. However, at the same time, some trade does take a lot of time. It may not be able to come out with a single strategy, and you may have to do quite a bit of permutation and combinations before you can come out with something new and successful.