If a trader holds a position active overnight, you are assessed a swap, often known as a foreign exchange swap. The difference in interest rates between the two currencies in the trading pair is referred to as a swap. Depending on whether you are in a long or short position, it is calculated differently. When trading with leverage, swap rates are assessed. This is because, when a leveraged position is opened, money is essentially borrowed to open the position.
Mechanism:
When you open a position on the Forex market, for instance, you are actually making two trades: buying one currency in the pair and selling the other. You effectively borrow the money necessary to sell one of the currencies, incurring interest charges in the process. However, you will receive interest on the currency you are purchasing. You might make money by holding the position overnight if the underlying interest rate for the currency you bought is higher than the currency you sold. However, regardless of the position established (buy or sell), you will probably be charged interest due to other factors, such as a broker’s markup. So, the swap rate is determined by the market and the next instrument you exchange. For instance, the amount of the currency swap will differ between EUR/USD and USD/CAD.
Swap Calculation:
The swap price may be favorable or unfavorable based on the swap rate and the position taken on the trade. To put it another way, you will be required to pay a price or be compensated for keeping your position overnight.
The swap estimation methodology for forex is as follows:
Swap = (Pip Value * Swap Rate * Number of Nights) / 10
Swap Dependencies:
The swap charge ranges based on:
- Your broker
- Nature of trade: Buy or Sell
- Currency pair
- Number of days trade is active
- Initial value of the trade
Swap free forex trading:
Swap-free forex trading is also present in the forex marketplace. There exist forex accounts with no swap fees. For opening a swap-free forex account, you need a swap-free forex broker. best swap free forex broker list is given next:
- Asset prime
- IC markets
- Octa FX
- Exness
- Pepperstone
