What is a swap?
What is a swap on ?
Swap - a trade-financial transaction involving the exchange of different assets and combining a purchase (sale) and a reverse transaction (sale or purchase, respectively) of the same asset. In this case the transaction is not made immediately, but after some time if the same or other conditions are met.
The term swap refers to a fee charged for transferring an open position to the next day. Swap is also called rollover or overnight.
What types of swaps are there?
There are several types of swaps:
- swap to extend the maturity of the securities;
- currency swap (purchase of foreign currency with immediate payment in local currency and subsequent sale of the purchased currency);
- gold swap;
- interest rate swap;
- swap with debt claims, etc.
All types of swap can be combined into a single trade. The execution date close to the transaction is value date, more distant - the date of the end of the swap.
The swap is a derivative financial instrument and is not a security.
It is customary to consider two types of swaps on the foreign exchange market:
- long swap - a fee for the transfer to the next day of the transaction to buy;
- short swap - a fee for postponing to the next day a sell transaction.
The swap value can be either negative or positive.
What is the essence of a currency swap?
In the foreign exchange market there is a principle that the seller is obliged to deliver the purchased currency to the buyer on the next trading day.
In short-term, medium-term and long-term trading strategies, positions are held open for more than one day. Since the trader is a speculator, he is not interested in delivery of real currency the next day, he is interested in keeping his trade open. This is what the trader is charged for, which is a swap.
For scalpers, pips and daytraders the term swap is not relevant.
How is a currency swap calculated?
Swap is calculated based on interest rates on the currencies used. In theory, the formula for calculating a swap is as follows:
- Swap = Volume of opened trading lot x Amount of swap point x Value of 1 pip in transaction currency
In practice, no one calculates the swap, because all the conditions, including the size of the swap for each asset, are provided in the review of the broker's trading conditions.
Where can I view the swap size of a currency pair in the MetaTrader 4 terminal?
You can find out the size of short and long swaps in the MetaTrader 4 terminal. To do this, open the "Market Watch" window, right-click on the desired currency pair and select the "Contract Specification" tab in the menu that appears.
In the window that appears, you will see all the information on the currency pair, including the size of short and long swaps.
A number of brokers have swap-free or, as they are also called, "Islamic" accounts, in which there is no swap.
How do I make money on swaps?
Most traders think that swaps are definitely extra costs that only brokers make money on. However, there are two ways to make money on swaps.
- The first way - the Carry Trade strategy
Carry Trade Strategy is based on profits from the difference in interest rates of the banks.
- The second way - hedging positions
This method is used on different currency pairs, one of which will have a positive swap, and the other will be swap-free. Transactions on these pairs are opened in opposite directions. Profits are formed in the long term due to the accrued swaps.