What is a Forex swap ? (Part 1)

When you trade in the currency market (or Forex), you express your opinion on the direction of a currency pair by buying or selling the base currency (the first currency of the currency pair). Therefore, you will make a profit (or suffer a loss) in the counter currency (second currency of the currency pair). This is because you agree with us, as the counterparty, to take a position in a currency before swapping it on a date of your choice with all the current profits (or losses) adjusted in cash in your account.

The length of time you hold a trading position depends on your strategy and trading plan. Swing traders can hold a position for days or even weeks, while typically, scalpers hold it for just a few seconds. When you are in a position, the price of the currency pair you are trading is not the only price you should watch out for. You should also be aware of any swap fees or finance charges.

Swap fees are strongly influenced by the underlying interest rate corresponding to each of the two currencies involved. These fees will be applied if you hold the position at the daily rollover time, which occurs at 12:00 a.m. (server time). In the Forex trading world, they are known as “tomorrow next” or “Tom/Next”.

Intra-day traders will not have to worry about swap fees, as they will always close their positions before the daily rollover time. However, it is important that traders who hold a position overnight, or longer, take heed of swap fees in their trading strategies.

How to calculate rollover interest rate ？

Swap fees are determined by interest rate differentials. Another way to observe the difference in interest rates between your base and counter currencies is interest rate spreads. Of course, there may be any differences between two interest rates, so when we deduct them and assess the differential, there is a possibility that you may be charged or received a daily interest. The factors affecting this amount are the lot size, the current market price, and the differential sizbetween the two interest rates at that time. This rate differential forms the basis of the carry trade.

(To be continued ... )