Swap: a trader's expense or an earning opportunity?

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В in a past article We have already mentioned the pitfalls of the currency market that beginners have to face. Today we will dwell on one more point, which affects the profit made or loss taken. We will talk about Forex swaps.

What is a swap (Forex swap)?

Currency swap (swap) - a fee credited or charged from the trading account for the transfer of an open position to the next day. The amount of this fee depends on the difference interest rates currencies set by the respective Central Banks. The swap can be either negative or positive.

What commission does a trader pay for carrying a position to tomorrow?

Charging a fee for carrying an open position is related to the specifics of the currency market, which does not imply any real supply of currency, but is focused on the speculative component.

For example, when opening a buy position on the currency pair GBP/USD in the volume of 1 standard lotWe do not physically buy sterling or sell dollars. Our interest is purely speculative - to get the price to go in the direction we want it to go. Due to the fact that real money is not delivered to us, and we are just speculating, the open position is rolled over to the next day (such rollover is called a rollover), and the broker charges a fee for this rollover, which is a swap.

Let's analyze this mechanism on a simple example. We open a buy transaction on the GBP/USD currency pair. That is, we buy the pound sterling for dollars. Let's say the interest rate set by the Bank of England is 3% and the interest rate set by the Fed is 2%. At rollover, the broker will calculate us a positive swap in the amount of:

3% (BA rate) - 2% (Fed Funds rate) = 1%

When opening a sell transaction on the GBP/USD currency pair, we buy dollars for pounds sterling.

2% (Fed Funds rate) - 3% (BA rate) = -1%

Taking a loan and lending to ourselves

The logic of charging a swap on a swap does not present any particular difficulty. When we sell a dollar, we do not actually possess real money, so we borrow it. For this, we are charged the lending interest rate set by the Fed at 2% when we roll our position over to the next day. Thus, by selling something we don't have, we are borrowing it, paying a daily credit interest rate for it.

As we have already mentioned, swap can be not only negative, but also positive. That is, roughly speaking, we are paid extra for an open position. Why does this happen? Let's go back to our example. When we buy sterling, we are deemed to agree that the position we open can be used to lend to other market participants selling sterling. So, roughly speaking, we are already lending pounds ourselves. For what we are charged interest corresponding to the interest rate of the Bank of England.

What do we get as a result? Buying GBP/USD, when we roll this position over to the next day, we get credit interest accrual, which is equal to 3% (Bank of England interest rate) and pay credit interest equal to 2% (Federal Reserve interest rate) for dollars borrowed for sale. In total we get the same 3% - 2% = 1%. Hence the positive swap.

How to know the size of Forex swap?

The size of the swap on currency pairs can be viewed in several ways.

The swap size can be viewed in the MetaTrader 4 terminal. To do this, in the "Market Watch" window, click on PCM, select the "Symbols" tab, find the desired currency pair and click on "Properties". The result will be approximately as follows:

Information about swap size in MetaTrader 4 terminal

The size of interest rates of different Central Banks may differ significantly. In this regard, swaps can be both very small and quite substantial.

Information on the amount of swaps for all trading instruments for different types of accounts can be found on the brokers' website in the section on contract specifications. Here is a fragment of a table with the size of swaps on the example of one of the brokers.

Information about the swap amount on the broker's website

When opening a position, in the "Terminal" window you can see a column labeled "Swap", which will display the actual amount of swap accrued on the open trade when it is carried over to the next day. Profit on the position will be displayed taking into account the accrued swap.

Displaying swap on an open position in the "Terminal" window of the MetaTrader 4 trading terminal

You can also install a script, of which there are many freely available in the network, showing all the information on the currency pair, including the size of swaps.

The swap is calculated at 17.00 New York time, which corresponds to 1.00 Moscow time.

It should be noted that if an open position is moved from Wednesday to Thursday, the swap is charged at triple the rate. This is due to the fact that banks do not work on weekends, but the credit rate is still charged.

Should we pay attention to swaps?

Many beginners are scared off by swap accrual, especially the triple swap from Wednesday to Thursday. In fact, there is nothing wrong with it. In the main pairs, swap sizes are not significant and do not have a special impact on the profit size. Another thing is the so-called exotic pairs. Due to the big difference in interest rates, the swap size can be quite significant, especially when holding a position not for a few days, but, say, for a couple of weeks or longer. In this case, swap-free or "Islamic" accounts, which are now provided by almost all brokers, come to the aid of medium-term and long-term traders.

It is worth noting separately that the existence of positive swaps formed the basis of the of the CarryTrade trading strategy.

As you could see for yourself, there are no special secrets and mysteries in swaps. Once you understand the principle of its formation and calculation, you can easily turn one of the pitfalls of the Forex market into an effective profitable tool.

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