What is swap and its types?
Swaps are interest rate differentials and commonly relevant in the currency markets. Of course, brokers who offer CFD’s also levy swap rates. If you are an intra-day trader where you close your trades by the end of the day, swap rates are irrelevant. However, if you are a swing trader and tend to keep your position open over a period of time, you must pay attention to the swap rates as they can add or subtract a small, yet significant amount to your trade.
A swap in Forex refers to the interest that you either earn or pay for a trade that you keep open overnight.
There are two types of swaps:
- Swap long (used for keeping long positions open overnight) and
- Swap short (used for keeping short positions open overnight).
They are expressed in pips per lot, and vary depending on the financial instrument you’re trading.
Swap rates or rollover rates are typically charged on an overnight basis and a triple rollover or triple swap rate is applied every Wednesday.
How are swap rates determined?
- In theory, when you buy a currency with higher interest rate and sell a currency with lower interest rate, you are charged a positive swap.
- Likewise, when you buy a currency with lower interest rate and sell a currency with higher interest rate, you are charged a negative swap.
How to check the rollover rates you are charged?
If you are trading with the MT4 platform, it is easy to check the swap rates for the currency pairs. To determine the swap rates, right-click on a currency pair in the ‘Market Watch’ window, click on ‘Symbols’ and expand the ‘Forex’ folder to view the list of currency pairs. Then select a currency pair and click ‘Properties’ to view the swap rate details.
Swaps can be an additional way to earn interest on open positions, especially if a positive swap is added to your position. This way, you can at the very least manage to cover any commissions or spreads that your broker might charge you and thus virtually trade for free. Negative commissions however do add small yet additional amounts to the already paid costs of trading.