Swap is overnight rollover fee. Sometimes, depending on the main difference of the interest rates between the currencies in a pair, this fee will be paid to you. It is a carry trade strategy. Carry trade trading strategy involves borrowing at a low interest rate and investing money in an asset that provides a higher rate of return.In this article we will not write about carry trade strategy – we will write about swaps.
You may be aware that there is money to be made in forex but as a beginner you may not be aware as to how to go about it. 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 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 give answer to the question how to earn swap in forex. We are sure the next few lines may help readers to come out with the right answer to the above question. It will help them to have a newer and more informed perspective about forex trading. It will perhaps assist them in being more successful in forex trading in the medium and long term perspective.
What Is Forex Swap?
Let us get started by understanding what Forex swap is all about. Put in simple words, when you opt for swap you will be able to keep a trade open overnight. However, you will have to pay a fee for this. The fee basically is the difference in the interest rate that exists between two currencies. This is with reference to a particular pair that you have chosen to trade on. The calculation is all about deciding the interest rate differential depending on your choice, i.e. either choosing to go short or go long.
How Does It Work?
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 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 as being in 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, then you are considered a carry trader.
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 a good idea to keep the trade open during the weekend because violent volatilities happen often 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.
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 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 bear in mind 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 and it 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, then you must put effort on research. You must visit a few sites and also use calculators so that you are updated about the possible outcomes using the swap option.
Is It Possible To Avoid Swap Fees In Forex?
Many new traders often ask the question if it possible to avoid swap fess in a forex transaction. To get 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 ways to do thing and to avoid paying the swap fee. It works fine but it might require some bit of practice and handholding before you are able to do it perfectly.
The Final Word
It is evident from the above that there are some pros and cons associated with using the swap mode of forex transaction by paying the requisite fees. Though there are ways to avoid them, you should not bother too much about it, till you are comfortable with the demo versions. However, you must not allow swap trading to completely take over swing trading. It all depends on your style of trading. If you are able to do it properly it is quite obvious that your wins will be much more than the fees that 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 with 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 permutations and combinations before you are able to come out with something new and successful.