SWAP is defined as interest paid or received for overnight positions that go beyond the usual New York closing time of 5 PM ET. Several brokers may have different closing times, but the closing of the New York stock exchange is generally considered as the end of a trading day. SWAPs are a result of the interest accrued due to the difference in central bank rates of the currencies that constitute a currency pair. SWAP interest rates are calculated according to the interest that can be earned on a currency that we buy and the interest that should be paid for the currency that we sell. Therefore, the difference between the interest rates can determine whether a trade ensures a positive or negative SWAP according to existing market conditions.
How Do Forex Trading Involve SWAP Fees?
Forex trading is a leveraged product that works on huge margin and significant volatility. Unlike other exchanges, Forex is a 24 hours market that is open for five days a week covering most major economies in the world. Therefore, apart from the opening and closing hours on the weekdays and weekends, there isn’t any particular time of the day when the market opens or closes during regular trading hours. Of course, the volatility and trading volumes fluctuate throughout the trading sessions, but a currency pair will experience some amount of activity in the market at any time of the day. The Forex trading market is home to different types of strategies that involve both short-term as well as long-term trading. A majority of retail traders typically opt for short-term trades that are usually over within the matter of a few minutes or hours; however, long-term traders often hold on to positions that can run for days, weeks, and even months. Therefore, long-term traders that hang on to overnight positions will be subjected to different SWAP rates that are calculated according to the prevailing interest rates and the amount of liquidity in the markets. Sometimes, brokers may also charge interests on margin trading, which can be added on to the SWAP rates for overnight positions. Forex trading on margin involves the broker investing their money in the markets on behalf of the trader. Brokers might require their clients to pay daily interest on the amount invested in the market as overnight interest rates. Traders using a higher leverage are particularly vulnerable to such interest fees, as a leverage of 1:100 will require a 1% margin and has the capability of entering a $100,000 position in the market with just $1000. Therefore, traders should consult with their brokers on the interest rates applicable to Forex trading while using high amounts of leverage.
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How Is SWAP Calculated?
Forex trading allows an investor to go long or go short on a currency pair, which essentially means that a trader can buy or sell a currency against another currency. If a base currency of a currency pair has a higher interest rate than the quote currency, the trader earns a positive interest for going long, while all short positions on the currency pair will involve a negative interest or interest paid to the broker. Some traders use SWAP extensively to earn a significant amount of income through positive SWAP, without risking their money on the market fluctuations or speculating in the market. Often, traders also use SWAP along with market speculation to increase their returns in the Forex markets. The ideal scenario for a positive SWAP is for the base currency to have a higher interest rate while the quote currency should have a lower interest rate. Therefore, by going long on such a currency pair, a trader can earn the maximum returns through a positive SWAP, while making a handsome amount of profits if the currency pair appreciates until the trader closes his position. However, SWAP rates and interest can have significant consequences on a group of traders that do not support the idea of paying or receiving interest on their investments. Some currency pairs will have negative SWAP for both long as well as short positions, especially due to the similarities in the central bank rates, which can add on to the cost of trading if positions are held for too long in the market.
SWAP Free Forex Accounts For Islamic Traders
Islamic religious beliefs are against any ideas that involve paying or receiving interest on their investments. Islam does not support the concept of free money, and religious believers are strictly against any industry that involves interest rates. Forex trading is not illegal according to Islamic beliefs, but SWAPs are considered to be illegal. Therefore, Muslim traders were unable to invest in the markets through regular Forex trading accounts. Nevertheless, Forex brokers slowly started embracing the idea of SWAP-free trading accounts that enabled brokers to cater to a whole group of untapped market potential in the form of Muslim traders. By eliminating the SWAPs and other aspects of interest related fees on trading accounts, Forex brokers were able to offer custom-tailored services for Islamic traders according to existing Sharia laws and customs. Several Islamic countries from across the world have started approving Forex traders that provide SWAP-free accounts, and if you are an Islamic trader, you can certainly enjoy the privileges offered by a SWAP-free account.
Forex Brokers With Swap Free Accounts For Regular Traders
Although SWAP-free accounts are reserved exclusively for Islamic traders, regular traders may be able to find Forex brokers with SWAP-free accounts that are completely devoid of any SWAP or interests. It is indeed difficult to find such brokers, but traders can browse through multiple options and perform extensive research online to get hold of SWAP-free trading accounts. Of course, traders should be careful while choosing a Forex broker, as they should always make sure that they only deal with regulated and genuine brokers that do not indulge in any fraudulent activities. There are several advantages of choosing SWAP-free Forex brokers for regular traders. Most retail traders are in the market to make quick gains, but often, traders are forced to hold on to overnight positions to enable the markets to conform to their strategies or analysis. Sometimes technical and fundamental factors prolong the movements in the markets, and this might require additional time for a trade to develop than initially perceived. Therefore, the SWAP rates might hinder the possibility of achieving better returns, especially if the currency pair has particularly worse SWAP rates for that particular session.