Swap or overnight interest rate in financial markets, particularly in Forex, refers to the difference in interest rates between two currencies in a currency pair. When traders leave their positions open overnight, depending on the interest rates of the central banks of the respective countries, they either have to pay or receive interest. This rate is typically calculated by the broker and is paid directly to the relevant central banks.
In fact, the swap acts as a cost for holding a position overnight and can be either positive or negative. If the base currency you have purchased has a higher interest rate compared to the quote currency, you are likely to receive a positive swap. On the other hand, if the base currency has a lower interest rate, you will have to pay a swap.
Types of Swaps in Forex
In the Forex market, swaps, or overnight interest rates, are categorized into several types depending on the broker’s structure and conditions. Below are three main types of swaps:
Positive and Negative Swap
If the interest rate of the currency you have bought is higher than the interest rate of the currency you have sold, you will receive a positive swap for holding the position overnight. On the other hand, if the interest rate of the purchased currency is lower, you will have to pay a cost, which is referred to as a negative swap.
Triple Swap
Some brokers typically calculate the swap rate three times higher on Wednesdays to account for the weekend holiday costs. This can significantly impact the costs or income generated from holding a position.
Swap Free
For traders who, for religious or other reasons, prefer not to pay or receive interest, some brokers offer swap-free accounts. In these accounts, the trader is exempt from swaps, but usually, the spread or commission on trades is adjusted to cover the broker’s costs.
How to Calculate Swap in Forex
Trade Volume: The amount of currency bought or sold in a trade, usually expressed in lots (Lot).
Base Currency Interest Rate: The interest rate of the first currency in the currency pair (the currency you have bought).
Quote Currency Interest Rate: The interest rate of the second currency in the currency pair (the currency you have sold).
Pip Value: The amount of price change per pip for your trade volume, which varies depending on the currency pair and lot size.
The formula for calculating swap in Forex is relatively simple:
Swap = 100 × Trade Volume × (Base Currency Interest Rate − Quote Currency Interest Rate) × Pip Value
The Impact of Swaps on Forex Trading
The effects of swaps can directly impact your trading strategy in both the short-term and long term. Here, we explore the various effects of swaps:
- Impact of Swaps on Long Term Trades
One of the most significant effects of swaps in forex trading becomes apparent in long-term trades. If you keep your positions open for an extended period, the swap costs or income can continuously affect your position. If you have a negative swap, the holding costs of the positions accumulate over time and can reduce your profits. On the other hand, if the swap is positive, you may consistently earn additional income from holding the positions.
- Impact of Swaps on Swing Trading Strategies
If your trading strategy is short term or swing trading, the impact of swaps is usually less significant because your positions are typically held for a short time, and the swap cost or income in these types of trades is minimal. However, in swing trading, especially if you open multiple positions throughout the day, swaps can have an impact and should be taken into consideration.
- Impact of Interest Rates on Swaps
The interest rates set by central banks, which form the basis of swaps, are influenced by various economic factors. When a country’s interest rate is high, a trader will receive a higher positive swap. Therefore, if you’re looking to take advantage of positive swaps, you should focus on analyzing central bank interest rates and predicting changes in them. Especially when central banks make adjustments to their monetary policies, swaps can experience significant changes that may affect your strategy.
- Impact of Swaps in Swap-Free Accounts
For those who are exempt from paying or receiving swaps due to religious or other considerations, some brokers offer swap-free accounts. These accounts are typically designed for Muslim traders who do not wish to engage in interest-bearing transactions. In these accounts, the trader is exempt from paying swaps, but other costs such as commissions or spreads may increase. In such cases, being aware of the additional costs of these accounts is essential for making informed decisions.
- Impact of Swaps on Specific Days
Some brokers, especially on Wednesday nights, calculate the swap rate three times higher due to the weekend holiday. This increase in swaps can significantly affect your profits or losses on those days. Therefore, if you plan to hold your positions for a long time or open large positions on Wednesdays, this could impact your costs.
Swap Management in Forex
For effective swap management in forex, focus on strategic trading and broker selection, stay informed about interest rate differences, and close your positions before the trading session ends in short-term trades to avoid swap costs. Additionally, choose a broker that offers favorable swap rates and consider swap-free accounts, such as Islamic accounts, for long-term trades.
In this regard, MondFx is a forex and CFD broker that provides services to a wide range of traders, including Iranian traders. This broker is one of the few that offers Islamic accounts with zero swap rates to its clients.
Some general features of MondFx include:
- Providing the Meta Trader 5 trading platform
- A wide range of trading instruments, including forex currency pairs, precious metals, indices, and stocks
- Various types of trading accounts to meet the needs of different traders
- Customer support in Persian
- Educational resources and training to help traders improve their skills
One of the key benefits of MondFx for Iranian traders is its services tailored to this group. The broker aims to provide suitable and accessible services by considering the specific needs of Iranian traders. This includes support in Persian, convenient payment methods, and educational materials tailored to Iranian traders’ needs.
Factors Affecting Swaps
Now, let’s examine the factors that affect swaps:
Interest Rates
One of the main factors affecting swaps is the difference in interest rates between the two currencies in a currency pair. In simple terms, each currency in the financial markets has its own interest rate set by the central banks of each country. If the interest rate of the base currency is higher than that of the quote currency, the trader may receive a positive swap. Conversely, if the interest rate of the quote currency is higher, the trader will incur a swap cost.
Market Conditions
Economic and political conditions can also significantly impact interest rates and, consequently, swaps. For example, in periods of economic instability or when central banks are looking to lower interest rates, there can be significant changes in swap rates. Additionally, inflation expectations and monetary policies can also affect swaps.
Currency Pair Type
The type of currency pair being traded directly influences the swap rate. Currency pairs involving a strong economy and high interest rates generally offer higher swaps. On the other hand, pairs with currencies from countries with lower interest rates or emerging economies tend to have lower swaps.
Position Holding Duration
Swaps are generally calculated for each night a position remains open. This means that the longer you hold a position, the higher or lower the swap rate may be. In some cases, swap rates change daily and may vary on specific days, such as during holidays or weekends.
Broker Provided Rates
The brokers you use to conduct your trades are ultimately responsible for setting swap rates. These rates are typically determined based on market conditions and the broker’s need to attract or absorb liquidity. Some brokers offer fixed swap rates, while others provide variable rates that depend on daily market conditions.
Supply and Demand Fluctuations
Swap rates can also be influenced by supply and demand in the financial markets. If there is high demand for a specific currency, the swap rate may work in favor of traders, as this demand typically leads to higher interest rates. In contrast, if supply exceeds demand, the swap rate is likely to be negative.
How to Avoid Swaps in Forex?
To avoid swap costs in forex, the best approach is to close your open positions before the end of each trading session. If you wish to hold trades for a longer period, it is recommended to use Islamic accounts that are swap-free. This method can help you avoid additional costs and execute your long term trades under better conditions.
Advantages and Disadvantages of Swaps in Forex Trading
Swaps in forex have the following advantages and disadvantages:
Advantages
Opportunity to earn from interest rate differences: If the interest rate of the base currency is higher than the quote currency, the trader can benefit from a positive swap and earn additional income.
Long term trading strategies: For those who follow long term strategies like Carry Trade, swaps can act as an additional source of income.
Hedge against volatility: In some cases, swaps can act as a hedge to reduce the impact of short-term rate fluctuations in the market.
Disadvantages
Additional costs for short-term trades: If you frequently engage in short-term trading, swaps can quickly accumulate significant costs and reduce your profits.
Volatility in swaps: Swaps can change depending on interest rate fluctuations and market conditions, exposing you to unwanted risks.
Limitations in Islamic accounts: Some traders opt for Islamic accounts to avoid swaps, but these accounts often have specific features that may not be suitable for all traders’ needs.
Difference Between Positive and Negative Swaps
A positive swap occurs when the interest rate of the currency you have bought is higher than the interest rate of the currency you have sold; in this case, you receive income for holding the position overnight. Conversely, a negative swap occurs when the interest rate of the currency you have bought is lower than that of the currency you have sold, and as a result, you pay a fee to the broker for keeping the position open.
This issue is particularly important for traders who hold their positions for a long time. In strategies such as Carry Trade, the primary goal is to profit from positive swaps, while in short term trades, swaps have less impact but can still contribute to your daily costs or income.
Gold Swap in Forex
Gold swaps in forex do not have a fixed value and can vary depending on the broker’s policies, market conditions, and financing costs.
Each broker determines its specific swap rate based on interest rates, the daily price of gold, and other factors. Additionally, brokers may apply a higher swap rate on certain days of the week (e.g., Wednesday or Friday) to compensate for the costs or income related to the weekend holidays. To get an exact value of the gold swap, it is recommended to refer to the Contract Specification section on your broker’s trading platform.
Viewing Gold Swap in Meta Trader
Here’s how to view the gold swap in Forex (Meta Trader):
Launch the Meta Trader platform
Open the Meta Trader trading platform (MT4 or MT5).Select the Gold symbol (XAU/USD)
In the Market Watch window, which is typically located on the left side of the screen, find the gold symbol. If you don’t see the gold symbol, right-click in this window and select Show All to display the full list of symbols.Open the symbol’s specifications
Right click on the gold symbol (XAU/USD) and select Specifications or Properties. In this section, you’ll find information about the symbol, including various trading parameters.View the swap rates
In the Swap Long and Swap Short sections, you can see the swap values for long (buy) and short (sell) trades. These values are typically shown in pips or percentages and represent the cost or income applied to your account for holding the gold position overnight.
Sharia Ruling on Overnight Interest Rates or Swaps
From an Islamic perspective, receiving or paying interest (Riba) is considered forbidden (Haram). In forex trading, the overnight interest rate (swap) is a type of cost or income resulting from holding a position overnight, which has a usurious nature. For this reason, many Muslim traders, as well as those who seek to adhere to Sharia principles, use Islamic or swap-free accounts to avoid any association with Riba.
Islamic accounts (Swap-free) are usually designed to eliminate interest costs, replacing them with fixed commissions or other models that do not involve usury. It is recommended to carefully review the terms and conditions of any Islamic account before selecting one, and if necessary, consult with a Sharia advisor to ensure its correctness and compliance with Islamic principles.
Does the Base Currency Affect the Swap?
Yes, the base currency directly impacts the swap in forex trading. Swap rates depend on the interest rate differential between the base currency and the quote currency. When the interest rate of the base currency is higher, a positive swap is likely to occur for a buy position, whereas a lower interest rate may lead to a negative swap.
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