There are many less understood terms used in Forex trading, and one of them is a “Forex swap.”
It's crucial and beneficial to be familiar with and knowledgeable about swap since it can have a significant impact – whether positive or negative – on a trader's profits. In this article, we will discuss swaps and help you know more about them.
What Is a Swap in Forex Trading?
A Forex swap, sometimes called FX swap or Forex rollover, is the interest fee charged and paid to you on positions held overnight. The value of a swap can either be positive or negative. It depends on the position on the trade and the swap rate.
There's always a possibility of you paying a fee, or you will be the one being paid the price for holding your position overnight.
Swap Fees
Essentially, swap in Forex is rates and fees. The swap rates depend on the market you are trading on, and the swap fees vary depending on:
- The instrument you trade;
- The online broker;
- The position’s nominal value;
- The type of your position, whether a sale or purchase;
- The number of days or the duration the position is open.
Generally, there are two types of swap:
- Swap Long – this is used for keeping open a long position overnight;
- Swap Short – this is used when short positions are kept open overnight.
Why Are Swaps Used?
A Forex swap is often used by traders or hedgers whenever they need to roll an open Forex position forward to another date in order to avoid and delay required delivery on the contract.
For example, traders will usually perform a rollover or execute a tom next swap to extend the value dates of formerly spot positions one day earlier to the current spot value date.
Corporations can also use a swap for hedging purposes, especially if they observed that an anticipated flow of currency cash they have already protected using a forward outright contract would be delayed. Like for an additional month.
What Is Tom-Next Swap?
Tomorrow Next or Tom-Next talks about a currency bought and sold simultaneously or on two different days – tomorrow (tom) and the day after (next day.)
Tom-Next swaps, like the ones mentioned above, are financial instruments you can fully trade. The rate of these instruments flows with monetary policy expectations and other market forces, like the demand, supply, and liquidity affecting the market. Most institutions use a Tom-Next arrangement to delay their settlements.
Making Money Using Swaps
As most traders whose moves and transactions are driven by the thought of profit, you’re probably wondering if you can make money out of swaps in Forex trading. The answer is yes.
Trading on a margin gives you interest in your long positions while you pay interest on short positions. The net interest difference in that situation is called a carry, and there are traders who profit from them.
Carry Trading
Traders often take positions in a currency with higher corresponding rates whenever the market conditions are suitable. They also fund the trade by shorting the currencies with lower interest rates, netting off the positive interest difference.
This is carry trading, and it is a large part of the Forex landscape and is sometimes a significant consideration for some hedge funds. Traders who use this to seek profit and make money using swaps are known as carry traders.
Positive Carry vs. Negative Carry
There are two ways the result in a carry can go – positively or negatively. Carry results are positive when you gain and receive interest more than the amount of interest that you are required to pay.
If it goes the other way around, it is a negative result. Either result, the carry is always directly added (for positive results) or subtracted (for negative results) from your account.
Carry Trading Strategy
If you want to try carry trading and want to have positive carry results, you can follow the strategy below:
- Open the chart window of your preferred currency pair that has a high positive swap.
- Try your best to predict the flow or the movement of the price on the daily, weekly, or even monthly charts.
- Perform a buy or sell trade while considering the positive swap direction and your preferred trend. Never place a stop-loss order while doing so.
- Wait for the results.
- Close the trade if you observed an increase in your profit brought about by the swaps and if the amount is enough for you.
Gain Profits with Swaps
Trading is simple if you’re well-versed in the market. Knowing things like swaps enables traders to strategize and help them benefit themselves by gaining profits out of their trades. Utilize swaps in ways you think would be beneficial but be sure to look out for risks as well.