The task of each successful trader is to find the most advantageous points of entering the market and exit from the transaction. Finding such pionts will allow a trader to earn money on speculative operations at the foreign exchange market. And often this requires to postpone the closing of the transaction to another day. Trading that goes beyond the current day, one way or another, involves an additional type of commission - a swap. We will describe in more detail how it is charged and whether it is possible to earn on swaps.
Beginners in the foreign exchange market who want to trade outside the trading day are afraid of the presence of swaps. Most of them have a clear conviction that the additional commissions charged as swaps are very large and can seriously undermine the trader's deposit. Anyway, the fact that there is a write-off of funds from the deposit is not pleasing to anyone at all. But swaps will not always be negative - there are situations in which they can bring some profit, albeit not in a large amount. What does it depend on? What are swaps? And is it possible to trade without swaps in principle? We will try to answer these questions in this article.
What is a swap?
In the financial community, a swap is a transaction in which an exchange of some assets or any financial liabilities takes place. The main thing to understand is that the exchange is temporary. As if two friends temporarily decided to exchange something that is equivalent in value to each other.
The operation takes place in two stages: at the first, the exchange of liabilities or assets takes place, and at the second, final stage, the reverse exchange.
It should be understood that a swap in financial markets is divided into the following types:
- currency swap - debiting / accrual occurs in relation to specific currencies;
- swap for securities - write-off / accrual is carried out in the case of operations with shares and other securities;
- commodity swap - the procedure is similar to the previous two, with the only amendment that goods, fuel, etc. are involved in the “case”.
- credit default swap - transfer from one side to another of credit risk on bonds and mortgage-backed securities, as well as corporate debt obligations.
- interest swap - is a contract concluded between two parties for the exchange of interest payments accrued on a notional amount of money.
How does a swap arise?
The first question, what the amount of accrued swap depends on? Remember that the Forex market operates five days a week. Every day at the time of official closing of the market at 21:00 GMT, all orders opened during the day must be closed so that they can be settled using actual funds in all world banks involved in financial transactions.
The trader is not interested in the actual calculation of funds - he works with speculative operations and makes money on the difference between buying and selling assets. But there is a rule, and brokers are required to “report” to banks and close their positions. In the case of traders working outside of one business day, the following occurs: the operation is “extended” for one more day, but in fact the broker opens a new position with identical trading volumes but different terms of the transaction.
New day - new rules, at least with regard to the discount rates of the Central banks, with the currencies of which traders make transactions. Therefore, the difference in the discount rates of the Central Banks with the currencies with which the trader works is embedded in the swap.
How and when is a swap charged?
Based on the fact that the procedure for exchanging a financial asset or liability is carried out in two stages, as we managed to notice earlier, at the last stage, the swap transaction will be closed. True, with one clarification - only if the transaction is not made on one trading day, but is postponed to the next day. That is when making a buyback, let's say currency, the next day a swap occurs.
What determines the accrual of a swap? It depends directly on the difference between the discount rates of the Central Banks. There are formulas for calculating swaps:
With a positive difference in discount rates:
- Currency swap = Transaction amount * (Interest rate difference - Broker commission) / 100) * Current price of a currency pair / Number of days in a year
With a negative difference:
- Currency swap = Transaction amount * (Interest rate difference + Broker commission) / 100) * Current price of a currency pair / Number of days in a year
As we can see, the broker's commission is only one of the components of the swap, and not as is commonly believed that this is the swap itself. No, it is not so. We remind you that it is not the broker who sets the swap at its’ discretion, but this value is calculated.
Scalpers and intraday traders, working exclusively within the same trading day, do not encounter this concept at all. The topic concerns only those who prefer to hold trading positions for a day or more.
A trader does not need to independently carry out calculations according to the above formulas in order to find out what the swap is for the current day. Brokers have simplified this, and on their official sites there is information on swaps.
The values of this indicator when comparing different companies vary slightly. And in the event that the trader plans to use a trading strategy based on swaps, he should choose a broker for swap values as well.
How to make money on swaps
In order to make money on swaps, there are several strategies, the most popular of which is Carry Trading. The popularity of using this strategy lies in the fact that the risks are relatively small, but you can get a good profit.
The essence of the strategy is to hold the position for as long as possible in order to get a positive swap, which, as you know, is automatically credited to the “profit” column. You should immediately understand that applying this strategy to any trading tool will not work. For this, it is necessary to conduct a thorough analysis of the assets offered by a particular broker and identify those whose swap is positive. At the same time, it is worthwhile to understand that for the same asset, a swap can be different depending on the longevity of positions. We are interested in precisely those positions where the swap is attractively positive, if we may say so. For example, the GBP/AUD currency pair, according to the specification of assets in a conventional Forex Broker, has positive swaps in short positions, while negative in long ones, which is clearly not of interest to a trader who adheres to the Carry Trade strategy. In a short position on this currency pair, the strategy can be applied.
In order to implement the strategy, you should adhere to some rules, namely:
- A trader must have an intuitive sense of the market, so he can conduct analysis on long timeframes and predict reversals. It is important to distinguish the real movement of the financial asset from their correction, which can be confusing.
- In no case do not neglect the news regarding the announcement of interest rates of Central banks.
With the correct application of the strategy, monthly profit is possible in the amount of 5% of the deposit.
Where to find a swap in the terminal?
You can watch the accrued or charged swap in the terminal when you open a buy or sell position. A special column of the same name is reserved for this value.
It should be understood that it will be accrued only if the position is transferred for one more day and depending on what the swap will be at the time the transaction is closed. The amount will be displayed in the terminal in the appropriate column: profit or loss. Loss, however, is more common, it just the truth.
Where to find a swap in the terminal
Small clarification is required. On certain days, namely from Wednesday to Thursday or from Thursday to Friday (a little later - the details), the swap is accrued or charged in triplicate. There is a simple explanation for this. The fact is that the weekend is ahead when banking institutions are closed. But this does not cancel the fact of revising the interest rate on loans, which is either accrued or charged. Therefore, the swap accrual procedure itself takes place in its usual mode, with the exception that for the days specified above, an advance payment will take place over the coming weekend. When planning a trade with this nuance, you should be extremely careful.
It should be noted right away that the timing of charging an increased swap for a number of currency pairs is different. Moreover, brokers provide various information on this issue.
Aplari sets the following rules: for swapping positions on Forex and spot metals from Wednesday to Thursday, the swap is charged in triple size, but the commission in triple size for the USD/TRY pair is charged from Thursday to Friday. Alfa-Forex broker usually charges a swap in an increased amount for major trading assets from Wednesday to Thursday, but the withdrawal or charging of a commission from Thursday to Friday occurs for the following currency pairs: USD/CAD.
Having understood all of the above nuances, dear traders, you should always be on the lookout before starting trading with a particular forex broker and carefully read the specification of assets, in particular, study the issue of writing off swaps in an increased amount.
What to do if you hold trading positions for a month or more?
This situation is quite possible, because traders who adhere to a long-term trading strategy hold their positions sometimes not for a day or two, but for several weeks or even months. Often this approach to trading is relevant not on currency pairs, where the market is very volatile, but on stocks, metals and indices.
But no matter what asset a trader chooses, if he adheres to the principles of a long-term strategy, then he will not get anywhere from charging swaps. And this, if you estimate at first glance, it can be quite a substantial amount that no one wants to lose for nothing.
In this case, it will be relevant to open swap-free accounts, as they are also called. It should be noted right away that, depending on the broker, swap-free trading is possible both on a separate type of account and may be offered to traders as a service that can be “connected” to any of the existing accounts. All the nuances on this issue are discussed directly with the specialists of a particular broker.
What is the salt, you ask? Indeed, for that matter, all long-term traders are reluctant to pay extra money for transferring a position for a day for weeks and months. But yes, there is a small catch - there is an increased commission for the position on such accounts. Somehow, the broker needs to recapture the costs, because no one will work at a loss.
As a result, the trader’s costs are equivalent to those that operate on simple accounts, where the swap is charged. The only thing that’s convenient is that you don’t need to monitor the cancellation of the swap every day.
Author: Kate Solano for Forex-Ratings.com