How do Swaps Work?
What is swap? How do swaps work? Why is the swap an important factor in the financial markets?
For forex traders, the term swap means much more than ‘change’. It is an important point in forex trading and many investors confuse the term widely.
This concept is actually the origin of the plus & minus (pros & cons) in your account. Overnight cost is reflected in your account as a gain or loss according to the interest rate difference between the currency pairs you have traded.
In other words, if you decide to put the high-interest one of the two currencies to the market and keep the low-interest one, the overnight carrying cost of the low-interest one will be added in your account.
Again, swaps can be confusing so, let’s explain further.
When you create a long position in EURUSD (currency pair), you give US dollars to the market and get euro with low interest in return. This transaction will return to the investor as a negative swap fee. On the other hand, when you sell EURUSD, you give euros to the market and get US dollars in return. You will also get a positive swap income for putting the low-interest currency on the market. So you will make profit. Swap fees will be the case for overnight transactions, which are also the transactions (or positions) that are not closed on the same day and transferred to another day.
Implementation of the swap is generally based on the official interest rates announced by the Central Banks.
Wednesdays are crucial
The swap fee works overnight. When you open and close your position within the same day, the swap fees are not taken into consideration.
Now, there is a rule of thumb:
Forex traders should watch out for Wednesdays! Swap prices are calculated for 1 day. However, the situation is different for Wednesday. A position opened on Wednesday and not closed until the next day, 00:00, is charged with a 3-day swap fee. The markets are closed on the weekends and the open positions in the pairs have a 2-day value.
When the markets are closed on holidays, swap continues to be the case for open positions.
Are you tired trying to understand how swap works? No worries! In the Forex market, you also have the option of creating a swap-free forex account. This account type appeals to investors who prefer to stay away from interest. And in addition to different account options with swap, Venn Prime Securities also offers a swap-free account option!