KUALA LUMPUR, MALAYSIA - Media OutReach Newswire - 29 March 2024 - One of the most misunderstood terms in Forex trading is swap or Forex swap. To trade successfully, you should understand what Forex swap depends on and how it is calculated. This material describes what a Forex swap is, explains its mechanics, and describes swap-free trading accounts.Forex swap.
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Definition Swap is a commission charged for carrying open positions overnight to the next trading day in the Forex market. The exact moment when the swap is withdrawn from your trading account depends on your broker. Most brokers charge it most often between 11 p.m. and 12 a.m. server time. The Forex market is over-the-counter and non-deliverable, meaning you are not the owner of the trading asset. In order not to cause the need for calculations, the system automatically closes an open position on the current trading day and opens it on the next one. Such closing is considered conditional, as the position is carried over, and the swap is charged.
Depending on the value of the swap and the position, the swap can be negative or positive. In other words, you will either have to pay a commission or be paid a commission for holding an open position overnight. This is because the margin system used in Forex trading allows you to use the additional capital the broker provides. You borrow funds to open a position from your broker.
There is an opinion among traders that the Forex swap is nothing but a broker's commission. However, this is not true. Let's find out how swaps work in the Forex market.
How do swaps work in the Forex market? Every time you open a position, you make two transactions: buying one and selling another currency in a currency pair. So, you are essentially borrowing that money to sell one of the currencies and need to pay interest on the borrowed amount. However, in doing so, the currency you buy will earn you interest.
If the base interest rate on the currency you buy is higher than the currency you sell, you can earn interest on the difference in rates for carrying an open position to the next day. However, given the broker's markup, regardless of the direction of the open position (buying or selling), you will have to pay a commission.
Thus, the value of a swap depends on the market and the instrument you are trading. For example, the swap on the same EURUSD and USDJPY positions will differ.