Forex trading has become very popular globally. And no wonder, the Forex market is the largest and the most liquid in the world. Traders are attracted to low barriers for entry, great liquidity, tight spreads and 24/5 availability.
Trading currency pairs is widely available as there are lots of brokers to choose from. There’s no artificial barriers from the brokers’ end. Although certain groups do face various restrictions from trading the FX markets due to their religious beliefs. In particular, followers of Sharia law are unable to trade currencies from regular trading accounts. Gambling and charging loans with interest rates are considered to be Harram or forbidden in Islam. In order to accept traders from Muslim countries, brokers create swap free accounts that are also known as Islamic Forex accounts. Let’s dive deep and find out what those accounts are, how to open them and how to use an Islamic account to trade forex.
Islamic account explained
Islamic accounts are specially created for traders of Muslim fate. An Islamic trading account is also known as a swap free account. As already mentioned, according to Sharia law, charging interest rates on loans is prohibited, in other words, it is considered to be haram. In trading, swaps are equivalent to interest on a loan as trading is a highly leveraged activity and traders increase their purchasing power by borrowing money from their broker.
In addition to no swaps, Ismaic compliant accounts generally do not offer precious metals or offer them without any leverage. So that there won’t be any interest charged for opening and closing trading positions.
Swaps are charged by brokers for keeping positions active overnight. Traders pay various fees for trading. For instance, they pay spreads, commissions, and account fees such as withdrawal, inactivity fees, etc. All of those fees are trading and account fees. Swaps are fees charged for trading using leverage.
In order to avoid paying fees on swaps, many traders choose to day trade. Meaning, they open and close trading orders within a day and no interest is charged. Swaps are also known as Rollover fees and they are charged when positions are open overnight.
How to choose an Islamic account to trade forex
Majority of Forex brokers offer swap free accounts to their clients. In most cases, these accounts are Islamic versions of regular accounts. However, not all brokers offer swap free trading and you should do your research prior to finding one.
Opening a swap free account doesn’t mean that you will be charged less. Yes, there won’t be swaps, but brokers increase spreads and administrative fees instead to compensate for the zero swaps. You should only consider opening an Islamic account if trading otherwise goes against your religious beliefs.
Islamic swap free accounts might have various disadvantages. For instance, there are no swaps, but some brokers might charge their clients with too large administrative and trading fees. Therefore, it’s important to find the brokers with the best fees. Security and fees are two most valuable characteristics of FX brokers. Yes, trading platforms are important, but not as important as you might think. Many traders use a combination of 2 or more platforms for trading. You can conduct technical analysis using one platform and place orders using another. Demo trading using regular accounts is not forbidden by the Quran, as you are not risking actual money.
Keep in mind that Sharia Law only enables traders to trade spot markets. For instance, if you are going to trade precious metals, such as gold and silver, you cannot use leverage to do so. As a result, brokers avoid offering metals altogether or offer them without any leverage. In general, you will be offered less trading instruments when using swap free accounts than in the case of regular trading accounts.
To choose the best Islamic account, make sure that your broker has a large variety of trading instruments and the trading fees are low.
How to open an Islamic forex account?
After you make sure that your broker offers swap free accounts, you can easily turn your regular accounts into Islamic ones. You just need to contact customer support and they’ll convert your account. Be noted that the broker might ask additional documentation from you to make sure that you are a religious person.
Keep in mind that some brokers only accept requests for opening Islamic accounts from countries that have significant Muslim population such as Turkey, Pakistan, Yemen, Egypt, Sudan, etc.
Trading like a pro vs gambling
According to Sharia law gambling is Haram. Many people view trading as gambling and no wonder, Forex trading is a form of spread betting. However, experienced professionals know what they’re doing and for them, trading is far from gambling.
If you are using an Islamic account, it doesn’t mean that you are fully following the Quran’s teachings. Brokers have done their part by removing swaps. And it’s time for you to do your part, understand the risks associated with trading and treat it as a business opportunity and not as a source for gambling.
Professional traders plan their trades and trade their plans. There should always be a good reason behind each open position. What’s more, there should be well defined reasons for entry, exit and trade management rules. Professional traders manage their risks. Gamblers do not.
Forex trading is not gambling, but it can easily become one for certain individuals that do not have trading strategies, can not manage their own emotions and risks. As a beginner trader, you should not be expecting to become consistently profitable right away. If you keep learning from your mistakes and develop as a trader, your trading will be in accordance with the Sharia law, even if you are losing in the process, the amount of money you lose should be considered as tuition for learning how to trade profitably long term.
The main takeaways
To sum everything up, Forex trading is becoming increasingly popular throughout the world. And Muslim countries are no exception. Sharia law prohibits gambling and charging interests on loans. In order to make trading available for traders of Muslim fate, brokers offer Islamic versions of regular accounts. Islamic accounts charge no swaps, which means that there’s no interest charged for keeping positions active overnight. However, instead of charging interests, brokers compensate by charging administrative fees or increased spreads. Another drawback of trading using swap free accounts is that there’s much less trading instruments available. Precious metals like gold and silver are generally offered without leverage or not at all. Brokers are doing their best by providing Islamic accounts. And as a Muslim trader, you should do your part by taking trading seriously and treating it like a business and not a source for gambling. Forex trading is also known as spread betting, but it’s far from gambling. However, many people fail to trade using a plan and lack discipline, which might lead to gambling with their own money.
FAQs on Islamic accounts in Forex
How can I open an Islamic account?
In order to open an Islamic account, make sure that your broker offers such accounts to their clients first. There are two ways to open Islamic accounts: you can open a new Islamic account or contact the customer support of your broker and ask them to convert your trading account into Islamic account.
Is trading with Islamic account halal?
According to Sharia law, gambling and charging interest rates is forbidden. Trading with Islamic accounts is halal as Islamic accounts are swap free accounts. In addition, a trader of Muslim fate should use proper trading methods and take Forex as business and not as a gamble. Professional traders plan their trades well and trade their plans.
Can I trade forex in Islam?
Yes. There’re a lot of Forex brokers that offer swap free accounts to their clients, which allows Muslim traders to place trading orders without going against their religious beliefs. However, keep in mind that not all of the brokers offer such accounts. In addition, brokers increase spreads or add administrative fees to compensate for the zero swap charges.