What is Swap?
A foreign currency swap, also known as an FX swap, is an agreement to exchange currency between two foreign parties.
Swap is also defined as the fee which is charged if the trade is opened overnight and in the above image the marked area is the swap that is charged on this account. Swaps are available in both positive and negative which means both debit and credit can occur on the swap.
If we say in simpler words it is an interest that we lose to the broker if our trade is open overnight. The timing of every broker differs as per their server so one must be careful of opening an order as per the time of the server because if you open an order late at night there might be a change of swap applicable once the time is over 12.
When is Swap Charged?
Depending on the opening and closing time of the market for that particular location then only Swap will be charged. For example, suppose you have opened a bid at 11 PM at night and the next day will start from 12 at midnight then after 1 hour the swap will be charged to your account and if you open a bid after 12 then it will be a new day and swap won’t be charged until that day is over. So, this is how you can be careful about the swap.
The swap rates differ as per your broker as it is decided by the broker only. Most of the time the swap is a very small amount. Swap is not charged for weekends because the market is closed on that day but the fees are rolled over to Wednesday night where the swap is 3 times the normal swap which is what most people are not aware of. Because the swap of Saturday and Sunday is included in the Wednesday swap amount.
How is Swap Calculated?
Swap is decided by the broker, for example refer the below image:
If you want to check the swap value of a currency you are needed to go to the particular currency, right-click on the currency and click on specifications options in which you will be able to find spread values.
A positive Swap means that we will gain profit when we close the bid, and a negative swap means that we will lose when we will close the bid.
And there are some brokers who are swap-free, but it is on the broker only when it starts or stops with a charging swap. Most of us are not known about the broker’s game.
Swap Benefits
1. It Improves liquidity conditions- when the exchange is done between two nations, the problem of blocking dollars and then converting to destination currency is solved giving enough room for improving liquidity in the market.
2. It also stabilizes the balance of payments – It helps out in stabilizing the balance of payments of the nation.
3. Breather during tough times – Foreign exchange swaps are more stable, especially during recessionary market conditions.
4. Boost in forex reserves – As both nations exchange dollars so it helps in increasing the forex reserves for a nation.
Penalty on Swap
Theoretically, swaps are both positive and negative. If we put a buy position overnight, we get a swap and lose rate whereas if we put a sell position overnight, we will lose the swap. This decision is on the brokers and mostly all brokers have some swap.
Usually, the swap is a very small amount, so mostly we don’t care about it. But when it comes to Wednesday night the swap is charged 3 times. So, the condition is if you want to earn more and pay less if you open a sell position close it before Wednesday so that minimal swap is charged.
Swap and Forex Trading
Swap is the value of interest added or reduced from the account. It is suggested to not hold a trade overnight. Even if you are new you might not be aware of swap or you will not be able to see it if you don’t trade overnight. The difference is the amount is not noticeable if it is very less.
Conclusion
To conclude the above discussion would like to say that most the broker do charge swap and there are some brokers who don’t charge the swap at all though that doesn’t mean that the broker is good if they are not charging swap while choosing broker all factors are needed to be analyzed. And overall, in simple, the definition of swap is the overnight interest fee.