What is a swap on Forex and how much does its size affect profits?
Relatively few traders delve into the trading conditions offered by their broker, much less any commissions and costs that are independent of the company itself.
Forex swap a commission charged to a trader for holding a position overnight, is the same for all companies and is not subject to any brokerage regulations or preferences.
The additional cost or benefit a trader may experience beyond the spread has a simple mathematical explanation. It's worth noting that swaps can be beneficial or detrimental to the profitability of your trade.
The concept of swap and its importance in trading
Many traders mistakenly believe that the size of the fee for carrying a position depends solely on the broker, and some companies manage to speculate on the basis of traders' ignorance.
In reality, a forex swap is the difference in interest rates between the two countries involved in a currency pair, which is charged for holding a position overnight.
Based on the basic definition of a Forex swap, we can confidently conclude that this commission is important for certain categories of traders. For example, if a trader day trades and uses a strategy that closes all trades by 24:00, they don't have to worry about being charged a commission on their trade.
However, traders who like to hold their positions for weeks and months, and whose trading is dominated by long-term transactions, are very susceptible to the influence of swaps, both positively and negatively.
Positive and negative swaps in Forex. Calculation example
If you've ever held positions on currency pairs for more than one day, you might have noticed that the Forex swap value can be either debited from your account and negative, or credited to your account and positive. This is directly related to the central bank interest rate.
Let's imagine you've decided to buy the GBP/USD currency pair.
When purchasing this currency pair, you should clearly understand that you're buying GBP and simultaneously selling USD. Since you don't have that amount of USD, you're essentially borrowing USD, and naturally, you have to pay a commission to the Central Bank for this transaction. Since you don't close the trade and hold the GBP, the bank has the right to use your funds, and a credit is credited to your account for this transaction.
Thus, the swap size in forex is calculated as the difference between the credited funds and the debited funds. So, let's imagine that the interest rate on the GBP is 3 percent, and on the USD, it's 1 percent. Therefore, if we buy this currency pair, we get a value of 3 - 1 = 2 percent of the sum. Now, if we translate this into real numbers, then under these conditions, on a sum of $10,000, you would receive an additional $200.
Where to find this value.
To avoid searching for interest rates , you can use two sources of information on Forex swap rates, both for buying and selling.
The first source of information is located directly in the MT4 trading terminal.
To find the information you need, right-click on the currency pair symbol and select "Specifications." A table will appear showing the required commission for both long and short positions:
The second source of information is your broker's , where you can find contract specifications. It's also worth noting that the information in MT4, as well as on the broker's website, is expressed in pips, which significantly simplifies calculations. For example, if you open a buy position on the USD/JPY currency pair, you will be credited with 1.21 pips per day. So, if you opened with one lot, and the pip value is $1, you will receive a daily increase of $1.21.
On Wednesday, a triple swap is calculated, so on that day, you will be credited with $3.63. Now let's calculate the total if we held the position for 10 days, from Monday to Wednesday inclusive: 1.21 + 1.21 + 3.63 + 1.21 + 1.21 + 1.21 + 1.21 + 3.63 = $14.50. You must admit, this is a pretty good increase to your position if you hold the trade for just 10 days.
Swap rates for Forex currencies, stocks, and futures - https://time-forex.com/info/razmer-swopa
In general, the swap rate in Forex trading is very important for traders who prefer long-term trading , as it can lead to significant gains or, conversely, a negative value can cost you a significant portion of your profits. However, if you trade intraday, both positive and negative Forex swaps won't affect you in any way and shouldn't be considered.
