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 The exact moment when the swap is withdrawn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.
The
value of swap varies depending on:
●
type of the position—Buy or Sell
●
type of the asset
●
number of days the position
remains open
●
nominal value of the position
(number of lots).
Why is there a triple swap?
Sometimes,
a swap is charged for holding an open position over the weekend, even if you
did not have it on Saturday and Sunday. Such a fee is called a triple swap.
Since the markets are closed on weekends, the triple swap was invented to
compensate for this and is charged either on Fridays or Wednesdays, depending
on the specific market.
This
is because orders are settled on the Forex market on the second working day
from the trade date (T+2). Since the value date falls on a weekend, the
transfer is made for three days at once (on Monday). Therefore, from Wednesday
to Thursday (at 12 a.m.), the swap is charged for the past weekend and
Wednesday.
In
other words, if you hold your position overnight when the triple swap is
applied, your order will be charged three times the standard swap.
Are there swap-free accounts?
To
make trading more convenient and accessible, many brokers have introduced the
concept of swap-free accounts.
Swap-free
accounts relieve the trader from the need to constantly monitor the size of
accounting rates on currencies in a currency pair, make trading more
straightforward, and allow taking into account in advance the commission for
the transfer of positions when calculating the financial result of planned
transactions. It is also relevant for those clients who cannot use swaps due to
religious beliefs. This determines the second name of this type of
account—Islamic accounts.
Charged
daily, the swap fee accumulates over time, making trading less favourable. To
enhance the investment opportunities of its customers, Octa has decided to
remove swap fees for all types of trading accounts. These fees will no longer
prevent traders from using medium- and long-term strategies in the financial
market. Now, they can keep that position open for as long as they see fit and
with no swap cost.
About Octa
Octa is an
international broker that has been providing online trading services worldwide
since 2011. It offers commission-free access to financial markets and various
services already utilised by clients from 180 countries with more than 42
million trading accounts. Free educational webinars, articles, and analytical
tools they provide help clients reach their investment goals.
The company is involved in a comprehensive network
of charitable and humanitarian initiatives, including the improvement of
educational infrastructure and short-notice relief projects supporting local
communities.
Octa has also won over 70 awards since its
foundation, including the ‚Best Educational Broker 2023‘ award from Global
Forex Awards and the ‚Best Global Broker Asia 2022‘ award from International
Business Magazine.
This article was written by FL Contributors at www.forexlive.com.