When starting to participate in the Forex market, investors are often concerned about whether there are transaction fees or not. In addition to needing to prepare the amount of money to make the transaction, you will have to pay fees such as Spread or Swap. Many people are interested in Swap fees, so what is swap in forex, and how to calculate Swap fees? Let’s find out with Learn Forex Trading in the article below.
Overview of what is swap Forex
Swap is a common term in the field of foreign exchange trading. To be successful in trading, traders need to clearly understand the definition, usage, and application of Swap fees correctly to achieve high efficiency. Below, we will provide a detailed explanation of the Swap fee and how to make the most of it.
The concept of what is swap?
Swap is a type of transaction fee in the Forex market, only incurred when you hold an order overnight. This means that if you open and close an order on the same day, you will not have to pay this fee. Swaps are calculated based on the interest rate difference between currency pairs daily. When you want to hold a position overnight, you will have to pay a fee for the interest rate difference between those two currency pairs.
To better understand what is swap in forex, let’s look at an example of the USD/CAD currency pair. When you place an order to buy the USD/CAD currency pair and want to hold the position overnight, you use CAD to buy USD. If the CAD interest rate is greater than the USD interest rate, you will have to pay the interest rate difference. That is also known as Swap.
Why is there a Swap fee?
Swap fees are calculated based on the relationship with currency interest rates. In each country, interest rate policies are set differently. This is the basis for forming the overnight Swap fee. The interest rate of a currency is regulated by the central bank based on monetary management policy. It reflects the economic situation of the country in each period. Therefore, there is a difference in interest rates between currency pairs. In Forex trading, you do not directly own any currency. Instead, when trading Forex, you make a transaction based on borrowing. Therefore, Swap fees are applied to cover the interest rate difference between currencies.
See more: Successful what is forex exchange trading?
What transactions incur a Swap fee?
Swap fees arise when you make a transaction without directly owning the transaction funds. Instead, you have to borrow. Swap fees are calculated based on the interest rate of the currency you borrow. This interest rate is also calculated according to the currency of the currency pair you buy. To better understand Swap, you need to learn about when fees are charged. This is very important and necessary for traders.
Notably, on Wednesday night of the week, the Swap fee will increase three times compared to other days. Because this swap fee is for both Saturday and Sunday nights. For example, if on Monday night, the Swap fee is 5 USD for 1 lot. Then on the 4th night, if you leave the order overnight, you will have to pay up to 15 USD for 1 lot.
Characteristics of the fee what is swap?
Swap cost is a special type of transaction fee. Not all traders pay. The Swap fee that each investor must pay is also different and not fixed.
When are Swap fees charged?
Swap fee calculation time is also based on the exchange. Usually takes place from 22:00 GMT to 24:00 GMT. For example, if the exchange stipulates a transition time of 22:00, opening an order at 21:59 will be charged. However, after passing the 22:00 time, no Swap fee is charged. Therefore, aligning the order opening time is an important decision for the trading process.
According to normal regulations, Swap fees will be calculated 7 days a week. However, Saturday and Sunday are holidays, and no transactions take place. Fees for these two days will be accumulated and calculated on Wednesday of the following week. This makes Wednesday’s fee the highest of the week.
How to take advantage of Swap fees
Every trader wants to take advantage of Swap fees effectively. Especially for those who make long-term trades (daily trade). Some currency pairs in the foreign exchange market have “exorbitantly high” Swap fees. You need to know how to apply this fee correctly. You should choose currency pairs with positive Swap fees, to benefit from receiving overnight fees.
As mentioned, Swap fees will be highest every Wednesday. When you make a trade during this time, you can receive significant profits. To avoid having your order accepted, you can widen your stop loss. Note that when the exchange opens, spreads will be higher than during peak hours.
How to calculate Swap fees correctly?
Choosing a Forex trading platform with the appropriate Swap level is extremely important and necessary. The use of Swap aims to increase profits in transactions. The specific calculation is as follows:
When should you keep the Swap order?
Determining when to hold what is swap is very important. Each Forex exchange has its regulations on Swap fee calculation time. This time can be flexible from 22:00, 22:30, 23:00, or 23:30 according to the time set on the software. For example, if your exchange applies Swap fees at 22:30, orders executed before this time will be charged Swap fees. Meanwhile, orders executed after this time will not be charged Swap fees.
Additionally, most exchanges today offer free overnight accounts. It is also known as an Islamic account, for Muslims. With this type of account, no matter how long or when you hold the position, you will not be charged a Swap fee. However, Swap regulations may vary depending on the exchange. So before trading, check specific information from your exchange. From there, you can clearly understand the time and conditions for calculating Swap fees.
Fee calculation formula what is swap?
Swap fees in Forex transactions can be calculated according to the following formula:
- Swap fee = Trading volume (number of lots) * Standard lot unit * Swap rate in pip * pip value/currency.
In the above formula, the Swap rate in pips is calculated by dividing the Swap rate in points by 10.
If you place a Buy 2 lot order, the Swap fee will be calculated as follows:
- Swap = 2 * 100,000 * (0.2/10) * (0.0001/0.89855) = 0.445$/night. If you hold the position for 3 nights, the total Swap fee will be $1,335.
If you place a Sell order of 2 lots, the Swap fee will be calculated as follows:
- Swap = 2 * 100,000 * (-4.84/10) * (0.0001/0.89851) = -10.77$/night. If you hold the order for 3 nights, the total Swap fee payable will be $32.31.
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Instructions for calculating swap fees
Nowadays, most software systems automatically calculate and display the Swap fee in the “Swap” column. You don’t need to calculate or apply complicated formulas. If the index shows a positive number, it shows that the buying interest is higher than the selling interest. If the index shows a negative number, then the interest rate you have to pay to the exchange when holding the position overnight.
See more: Instructions for registering an Exness account
What do traders need to keep in mind when calculating what is swap?
To trade successfully and avoid errors, you need to note the following points:
- Always check the total Swap fees across currency pairs. Always prioritize currency pairs with positive total Swap fees.
- Overnight Swap fees are not fixed and may vary by exchange, day of the week, and week of the year. So always check the Swap long and Swap short ratio before making a trade.
- Some currency pairs have Swap fees of up to 200-300 USD per night. Therefore, when trading, please observe and consider before leaving the order overnight.
- The Swap long and Swap short parameters are just indicators for you to apply to calculate the Swap fee.
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Always check swap fees when trading
In addition, to better understand Swap fees as well as forex, you should also learn more information. E.g. What is XAUUSD? What is volume? so that you can gain more trading experience.
Epilogue
Swap is a familiar concept in Forex trading. It refers to the interest rate difference between two currencies in a trading pair. With the information about what is swap shared in detail by Learn Forex Trading in the above article, we hope you can use it as a useful tool to minimize trading risks, save costs, and manage costs. The capital in the account is reasonable and safe.
Frequently asked questions?
What is swap trong forex?
In forex, a swap is the cost charged when a trade is held overnight.
How to calculate swap fees?
The swap fee is calculated based on the interest rate difference of the two currencies in the trading pair and it applies directly to the number of days the position is held.
How to check swap fees on a specific currency pair?
Many forex exchanges provide specific swap fees for each currency pair. You can check the swap fees section of the products or use trading tools to view the swap fees.
