In Forex trading you will come across various trading fees. Traders are charged fees that are directly and indirectly related to trading. Indirect fees are transaction commissions, inactivity fees and administrative fees. Direct fees are spreads, commissions and swaps. Often traders get information about spreads and commissions easily but swaps remain hidden. Let’s find out what swaps are and how they are used in Forex trading.
Definition of swaps
In Forex trading, swap is an interest that you earn or pay for a trade that you keep open overnight.
Why is understanding swaps important for traders?
- Swaps are trading fees that can directly affect your trading balance.
- Islamic accounts are using swap free accounts.
- Swaps are often hidden and brokers avoid mentioning them when marketing trading fees. However, understanding swaps in trading is vitally important.
- Swaps can be positive or negative.
Swaps explained in more detail
Swaps are also referred to as rollover fees. That is because the fee is charged by the brokers for keeping positions open overnight.
Swaps are very small when you are not trading huge positions. However, they can add up overtime. When you take out a loan from a bank, you are charged with interest rates, similarly, Forex has swaps as trades are using leverage, or borrowed funds to increase their purchasing power. Swaps take into account interest rates of base and quote currencies in the calculations.
In addition, Swap free accounts are also known as Islamic accounts. The account types are offered by brokers in order to let traders of Muslim fate open and close positions without going against their religious beliefs. According to Sharia Law, charging interests on loans is forbidden. As a result, you might think that swap free accounts are more affordable. However, that is not the case. To compensate for offering zero interest rates, brokers increase spreads or administrative fees. Traders should avoid opening swap free accounts unless they follow Sharia.
In order to save fees on swaps, many traders daytrade. Meaning, they open and close positions within a day and are not charged with rollover fees.
Example of swaps in trading
Now let’s see an example of swap in Forex. As we have already mentioned, swaps can be negative or positive due to the difference between interest rates of base and quote currencies. In the example of EUR/USD, if swap rates were 0.611/1.00, on a long trade direction of 10,000 Euros, you would be charged 1 USD to hold the position active overnight.
If you were to sell EUR/USD with the 10,000 Euros of position size, you would receive 0.64 USD overnight. If the swap is positive, it will be added to your trading balance automatically. And if the swap is negative, the funds will be deducted.
Main takeaways from swaps
- Swaps are interests charged for keeping positions active more than 24 hours.
- Swap free accounts are also known as Islamic accounts and enable traders of Muslim fate to place orders without going against their religious beliefs.
- In order to avoid swaps, you can trade intraday.
- Swaps are generally small in size but can add up after a large number of trades.
FAQs on swaps
How do swaps work?
Swaps are charged for keeping positions open overnight. Swaps are calculated by using interest rates of base and quote currency, trade size, price and broker fees. To avoid swaps, you can day trade and terminate positions within a day.
What does Swap free accounts mean?
Swap free accounts are Islam compliant trading accounting that do not charge traders with rollover fees. Sharia Law forbids charging loans with interests. Keep in mind that swap free accounts do not mean more affordable. To compensate for the difference, brokers increase other fees and offer a limited amount of trading instruments.
