Diving into the fascinating world of Forex trading is an exciting journey that will lead you to new knowledge and experiences, and a brand new way to make money. But to make the most out of your new focus, you need to make sure that you have all of the information related to the industry.
There is a lot of very basic, almost beginner level knowledge, much like this guide, that will truly transform the way you interpret the industry. As with most things in life, the more you know, the better position you will be in when it comes to making the best possible trade decisions.
As you learn more about Forex trading, the term “swap” will come up at some point. You already know that Forex trading is basically the trading of currencies in order to make a profit, but that is just the surface of the industry.
What is a swap in Forex?
Forex swap is not actually a physical swap. Instead, a swap in Forex is an interest fee which needs to either be paid in or will be charged (added) to your account when the day’s trading comes to an end. So you will either be paid out at the end of the day or you will have to pay in.
There are two types of swaps.
The first swap is a long swap. This relates to keeping long positions open overnight. With the long swap, you will likely earn interest on your positions.
The other type of swap is a short swap. This one keeps short positions overnight. As you will earn interest on the long positions, you will have to pay interest when you have a short position.
So how do you make money on a swap?
Traders, who become known as carry traders when focusing on swaps, earn money on the net interest of the difference, which is referred to as the carry.
Obviously, when you are looking to make loads of money, you are going to have to make sure that you make more in interest than what you will need to payout. The amount you earn will be deposited into your account while if you end up earning nothing, but instead owe at the end of the day, the amount you owe will be deducted from your account.
As a trader, you have to know that there is a risk involved with this type of trade, just as there is a risk involved with any trade. That is, afterall, a part of what makes this industry so exciting. With swaps in Forex, the risk lies with those who open and close their trade on the same day. When they do this, they will earn no interest. So you risk earning nothing but what you have traded.
How to make money with the Forex swap
As we mentioned, those who are looking to make some money with the swaps, are called carry traders.
To become one, the first thing to do is find a high yield and a low yield currency trading pair, of which there are quite a few if you know where to start looking. Some are more popular than others, so it is important that you consider the competition for each trading pair.
The currency that you select should have a high-interest rate when compared with the currency it is paired with. If fact, you should intentionally look for a currency with a lower interest rate to pair it with.
Then you need to wait for the currency pair to be trending down rather than up. Money can be made off of the interest difference but only if it is a positive difference.
It can be complicated at first but once you get an understanding of how it works, you will be well on your way to making money.
You need to keep in mind that the currencies are not going to stand still. They are always moving which means what looks like a great investment right now, ends up being a loss later on, especially as you have to leave the currency at least overnight.
Can you avoid paying a swap rate?
Short answer, yes you can. And there are 2 ways you can do it.
Losing money is the last thing any trader wants to have to deal with, but with Forex trading, it can happen every close of day if you are consistently having to pay in the difference.
Luckily, this can be completely avoided.
Close your position before the end of day. All trade closes at a certain time and once it is closed, you won’t earn interest but you also won’t have to pay in any money.
Only trade in a positive interest. This can be easier said than done, especially if you are new to the process and not quite sure about how to only place beneficial trades.
Where can you find information about swaps?
A quick online search will produce results, but it’s not always going to be based on updated or accurate information. So you need to make sure that the online sites you are looking at features the most recent data.
Look for those websites that display the data in the easiest to read format. The currency pairs should have both a long and short position display. When the value has a minus in front of it, the swap is going to be negative while the lack of a minus will be a positive.
When you get started, you should consider trading some of the lesser known or rather, less popular pairs. And ideally, you should try to keep your positions open for more than 2 weeks, because this is more than likely the only way you can get a decent payout on swaps. If you are not going to leave your positions open for this long, it might not be worth it to even consider swaps.
Frequently Asked Questions
How do I stop forex swap?
By trading in the direction of positive interest, or by trading only intraday and closing petitions by 5pm and by opening up the swap free Islamic Account that offered by some brokers.
What is a negative swap in forex?
When you hold a short position for the currencies that have a higher interest rate compared to the bought currencies.
What is a swap fee?
An interest fee paid or charged to you at the end of every trading day.
How long can you hold a trade in forex?
For a few minutes to a few year
Why are currency swaps used?
To hedge the exposure to exchange rate risk. To reduce cost when you borrow foreign currency.