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What is a Forex swap and how to find out its value for each currency pair?



As you all already know, two currencies are involved in making transactions on the Forex market: the currency that is bought (deposited into the trader's account) and the currency that is sold is taken on credit. Due to the fact that the terms of the transaction are not known in advance (while the transaction is open), accruals on the foreign currency loan and deposit are made when carrying out the position transfer operation to the next day. Such a transfer of a transaction to the next trading day is called a currency swap on Forex.


So, first, let's give a definition of the concept of a swap on Forex (or SWAP) - this is the difference in interest rates on loans of 2 currencies, which is charged to the trader's account when the open deal is transferred to the next trading day. With such a transfer, the size of the swap charged to the account can be either positive (i.e. it will bring profit to the account) or negative (accordingly, it will be debited from the account).

As usual, transactions in the Forex market are made on a spot basis, that is, all amounts that have been wagered on the current business day must be delivered in full on the next business day. To prevent this from happening, you need to make a swap trade on Forex. A transaction of this type will allow you to close (old) and open (new) positions at the current exchange rate (taking into account interest rates). A currency swap in the Forex market will allow you to settle the obligations of each of the parties to the transaction.


Let's give a practical example to understand the essence and principle of calculating a swap on Forex.

The central bank for the currency of each country sets the discount interest rate. The rate may differ for each individual country. The difference can be so significant that many traders manage to make good profits by buying and selling currencies from different countries.

An example. In the US the discount rate is 3%, and in the UK it is 4%.

For the GBP / USD currency pair, 1 standard lot is bought (100,000 units of the main currency, in our case GBP) at the rate = 1.98.

Payment for a swap transaction on Forex will be the following value:

(100,000x1.98 / 100) x (4% -3%) = $ 1980 per year.

Accordingly, per day, the transaction for payment of the currency swap will be equal to:

1980 $ / 365 = 5.42 $ per day.


When you open a long position on Forex (buy Buy), purchase on the GBP / USD currency pair, USD is borrowed at 3% per annum and a deposit is opened for GBP at 4% per annum. Since the deposit interest exceeds the credit one, the currency swap will be credited to the trader's currency account in the amount of: + $ 5.42 per day.

If a short sell position (Sell) is opened on the GBP / USD currency instrument, the situation will be completely different: loan of GBP currency at 4% per annum and opening a deposit at 3% per annum for USD. In this case, the credit rate exceeds the deposit rate, and a swap transaction will be made daily from the trader's account to write off in the amount of: -5.42 $.

In our example, to simplify understanding, we used a one percent rate for each individual currency. In practice, interest rates on loans and deposits for each individual currency are almost never the same.

So, what is a swap and how is it charged, I think it is clear, now where can you see the swap value for each transaction during the trading process?

In the MetaTrader 4 trading terminal, when you have opened a position and have been holding it open for more than a day, the swap size will be displayed in a special field of the Terminal window.


What time is the Forex swap charged?

For each trade, the swap in the Forex market is charged exactly at 17:00 hours New York time (USA), or at 00:00 time in the market overview window of your MetaTrader 4 trading terminal.


Should you pay attention to swap while trading?

This question is asked by almost all novice traders who figured out the essence of this operation.

I will say this, if you trade currency pairs with a minimum swap value and can keep an open deal for less than 1-2 weeks, then there is no point in paying attention to it, since its size will not be significant for the deposit. And if you trade for the long term, that is, you can hold open positions for several months (or even half a year / year), then, of course, you need to take into account the value of the swap, since an impressive amount can accumulate over such a period.

To trade using the second option, a trader has the opportunity to open swap-free trading accounts, but at the same time, an increased commission for opening transactions will be charged, since the forex broker will need to somehow compensate for his losses.

When trading in the Forex market, there are special strategies for working with swaps, that is, such tactics are aimed at making a profit on positive swaps, and not on price jumps. These trading strategies are called "Carry Trading" and are applied to those currency pairs that have a significant positive swap.





Published on: 9/16/20, 1:34 AM