Investment Case

In forex or CFDs trading, when we are talking about a forex or CFD novice trader, the new trader will center upon price movement, leverage, and strategy. But one thing that most people do not consider is the issue of swap interest. Experienced Swap interest? Provided you ever took a trading position overnight and showed either a small credit or debit on your account, you already experienced the working of swap interest.

Swap Interest Concept

Swap interest (which can also be referred to as rollover interest) is the cost or profit which is incurred in keeping a leveraged position in trading overnight. Simply put, it is the difference between interest rates of two currencies in a forex pair or the commission charged on both the long and short positions in CFDs or other derivatives on leverage.

All of the trading days have cut-off times and they are generally at 5 PM New York time. Providing you hold your position open after this time, the broker will either charge you, or pay you, swap interest depending on which way your trade matures as well as on the interest rate differential.

What is Swap Interest?

Imagine that you have EUR/USD as a trade. The interest rate of euro can be less as compared to the U.S dollar interest rate. In purchasing (going long) EUR/USD, you are taking a loan in USD to purchase euro. The U.S. dollar does have an interest rate that is higher, so you may incur the difference. But when you sell (go short) against EUR/USD you are borrowing in the euro and then buying the USD hence maybe a small payment instead of a small payment to you.

Swap rates change since they may fluctuate day in and day out depending on the state of the market and what is happening in central banks in the form of interest rate policies. They are automatically calculated by your broker and they may be positive or negative

Why Swap Interest is important

Swap interest is a critical concept and it is particularly important to the traders who position themselves to hold overnight or longer periods. This is why it is important:

Impacts Your Profit/Loss: Swap fees must be controlled or they can eventually eat into your profits.

Effects on Strategy: Certain trading strategies, such as carry trading are constructed with explicit targeting taking the benefit of the swap interest, holding of position in high-yielding currencies.

Affects Duration of Trades: Short-term traders may fear leaving positions overnight to incur avoidable swap fees and swing or position traders must pay attention to it in analysis.

What is the Swap Interest Calculation?

Every broker would normally have a swap calculator or present the swap rates in the trading platform. The formula tends to be

• Lot size

• Number of days to hold

• Interest rate spread

• Type of instrument (forex pair, CFD, and etc.)

The calculations however can be complicated, but most platforms do these calculations automatically and we just apply the resultant effect on our trades.

Know about triple swap 

Wednesdays-when there are certain brokers protecting the weekend by charging triple swap.

A swap-free (Islamic) account is an option in case you have religious beliefs against interest.

Adjust your strategy to be in tune with the swap direction to take advantage of positive rollovers.

Final Thoughts

Swap interest does not appear to be a critical point, but it can influence your bottom line drastically, especially traders are the people who take a stance and wait days or weeks. Knowing how it works and integrating it into a trading strategy based on which smart choices will be made, and trading will be done more effectively.

With knowledge you are strong in the markets-know the swap interest and you are on the way to the journey of being a pro in trading.