The more you learn about Forex day by day, the term Forex Swap will come up at some point. Maybe one of the least understood terms in Forex trading is the “Forex swap”. It’s important to understand how the Forex swap works when trading, as it can impact your potential profits either positively or negatively.
What is Forex Swap?
Forex swap is not actually a physical swap. Forex Swap is an interest fee that is either paid or charged to you at the end of each trading day. It is an agreement between two parties to exchange a given amount of one currency for an equal amount of another currency based on the current spot rate.
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.
How to Calculate Swap?
All you need to calculate the swap rate is the contract size, current price, interest rate difference as well as markup that make up the swap rate.
Therefore, the formula is easy:
Swap = (One Point / Exchange Rate) * Trade Size (Lot Size) * Swap Value in Points
Can You Avoid Paying a Swap Rate?
Short answer, yes you can. And there are 2 ways you can do it.
Close your position before the end of the 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.
How to Earn Money from Forex Swap?
The most popular way to profit from a high swap rate is the so-called carry trade. This means buying a currency with a high-interest rate while selling a currency with a low-interest rate. This means that the broker will effectively pay you to hold this position overnight.
The essence of the strategy is to hold the position for as long as possible in order to get a positive swap, which, as you know, is automatically credited to the “profit” column.
In order to implement the strategy, you should stick to some rules, namely:
– A trader must have an instinctive sense of the market, so he can conduct analysis on long timeframes and predict reversals. It is important to distinguish the real movement of the financial asset from their correction, which can be confusing.
– In no case do not neglect the news regarding the announcement of interest rates of Central banks.
With the correct application of the strategy, monthly profit is possible in the amount of 5% of the deposit.
ENHANCE YOUR FOREX TRADING