In the financial market, a good knowledge of fundamentals, different aspects of forex, and its working are very important for your trading profession. Knowing trading terms will help you comprehend the actual cost of your trading, manage your accounts, determine your goal, and make well-informed and wise decisions for successful trading.
Let’s start with: What are swap fees in forex?
A swap fee in forex is primarily an interest you paid or received for keeping a trade open overnight. Depending on the interest rate, a swap fee is applied to the trader as a cost or gain. A swap fee can be either negative or positive.
Swaps are the charges you will pay or earn for holding a particular trade overnight. A positive swap is an earning added to your account, while a negative swap is a cost deducted from your account. However, some potential ways can help you evade swaps and facilitate swap-free trading.
Read on to know what a swap fee is and how you can calculate swap rates.
What is the swap fee in Forex Trading
What is the swap fee or rollover fee in forex trading?
In Forex, a swap or rollover fee is the interest that traders pay or earn on holding the currency pair overnight, either for borrowing or lending the other. Clients can pay or earn in both currencies.
For overnight rollover fees, traders can see statements. The currency positions that remain open after 5 pm Eastern Standard Time will be considered to hold overnight. Swap fees or rates may vary depending on the asset, volatility, and current situation of the market. However, swap rates aren’t fixed; different brokers and banks offer different swap fees.
How to Calculate Swap in Forex
A swap fee is charged when a trader keeps a position open overnight. It is the difference in interest rate between the two currencies you are dealing with. Swap is calculated based on your long or short position. To calculate the swap fee for holding a trade overnight, the FxPro swap calculator can be used.
Keep in mind that the swap rate is measured in one lot. In forex, one standard lot for currency pairs equals 100,000 units of currency.
To calculate the swap fee for forex, choose the financial instrument you are trading, account currency, and trade size, and then click “ Calculate.”
Trading 1 lot of EUR/USD (short swap) with an account denominated in EUR
The swap can be calculated with the following formula:
Swap Fee= (pip value* swap rate* number of nights) / 10
Swap fee = (10* 0.55 * 1)/ 10= $0.55
FxPro calculates the swap and a rolled-over position once per day of the trading week. But swap is charged three times on Friday night due to the weekend.
How to Avoid Swap Fees
Many newbie traders inquire how to avoid swap or rollover rates if they want to trade without swap fees. There are three possible ways to avoid swap fee rates:
- The easiest way to avoid swap fees is to choose Intraday trading. Close your trade before 5 pm EST ( or before the rollover time of your broker). This way, you will neither earn nor pay interest or swap charges.
- Look for trading trends and trade in the direction of Positive Swap. While trading, choose the currency that gives you a positive swap.
- Lastly, some brokers offer Swap-free accounts or platforms such as Hotforex and Avatrade swap-free accounts. Otherwise, open a Swap-free Islamic Account to avoid Swap fees.
Mt4 Swap Fee
What is the swap Mt4 fee?
While trading forex, traders buy and sell different currency pairs with different interest rates Traders will earn a swap fee or rollover fee if the buying rate of a currency pair is higher than the selling rate. On the contrary, traders will pay an overnight fee if the buying rate is lower than the selling currency pair.
Mt4 Swap is undoubtedly an overnight fee; investors have to pay a swap fee to the forex broker for keeping a position overnight. Mt4 swap fee is based on the interbank market, particular exchange, and leverage rate.
A swap fee is delivered to brokers daily from liquidity providers. You can also check the swap fee on Mt4.
You can calculate the Swap fee by the following formula:
Swap=(Exchange rate/one point) x Volume (lot) x swap value in points
You will get a profit if the swap outcomes are positive. But in case of a negative swap, you will pay interest.
Is Swap Fee Haram
A swap or rollover fee is essentially referred to as interest strictly outlawed in Islam. That’s why forex trading is also forbidden in Islam.
A swap is an interest paid or gained by the trader for holding an open position overnight. So it’s Haram according to Islamic Sharia. Because of Islamic laws (Sharia Law), all types of interest-based loans, swap fees, or rollover fees are forbidden in Islam.
Can Muslim traders invest in swap-free accounts?
However, Muslim traders can invest in a modified and swap-free Islamic version of forex trading which is permitted and halal for Muslims. Usually, Islamic banks and accounts are swap-free and don’t charge swap fees or rollover fees.
Frequently Asked Questions
What are the types of swaps in forex?
You have to pay a swap fee while trading in currency pairs and don’t close your position before the end of trading hours.
There are two types of swaps in forex. Swap long is used to keep long positions open overnight, whereas swap short is used to keep short positions open overnight. Both may differ depending on the financial instruments you are dealing with.
Why do traders hold their positions overnight?
Generally, traders keep their positions overnight, expecting that their profit will boost, a loss will lessen, or become profitable on the next trading day. On the other hand, inadequate knowledge of the forex market may also lead to holding an overnight position.
However, a trader can also fail to manage a position and end up keeping a trading position without knowing that he has to pay a swap fee for holding a trade beyond the trading hours.
What is a negative currency swap?
A negative swap will result when you hold a position of a currency with a higher swap fee or interest rate as compared to the other currency you bought.
You will face a negative swap or loss, and a swap fee will be deducted from your account. For instance, a negative currency swap will be withdrawn daily if you buy USD/ZAR.
What is the purpose of a swap?
While trading currencies, a trader or investor borrows one currency to buy another.
A swap is a net interest return on holding a currency position overnight. However, in forex, trading with leverage applies interest because a trader borrows a position. Interest is paid on that loan when a trading position is open for more than one day.
Therefore, swaps fees are leveraged currency’s interest rates or rollover rates.
From the above post, it is obvious that “A swap fee in forex refers to interest earned or paid for holding an open trade overnight or for more than one night”.
However, you can get rid of swap fees or rollover charges if you close your trade before 5 pm EST.
Choose to trade currency pairs with positive swap, opt for Intraday trading, or choose swap-free or Islamic accounts to avoid swap fees.
It would be better to avoid a potential loss with a swap-free brokerage. Lastly, no need to bother with swap fees if you love scalping in forex because scalping can help you to get benefits from swap fees.