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What is Forex swap?

Starting working with Forex all the new comers get acquainted with Forex leverage that allows a trader attracting the borrowed funds to increase the volume of his own transactions and then his profit. In general, gaining the profit, better in large volumes, is a major purpose of Forex. That is why you should thoroughly study everything that can help or damage the results of the activity. Here we will pay special attention to one of the given factors that is Forex swap.

Forex swap is an action which is done by the broker every day. He transfers trading position of a trader to the next day. This situation can both help the currency profiteer gain much profit and prevent from earning money as well as remain unnoticeable. Taking into consideration such a peculiarity one should not neglect this factor able to influence the activity on the Forex market very significantly in a certain situation.

Functioning mechanism

Forex swap is a passive situation for a trader when he has to close all the acting positions at 9 p.m. GMT and open them again. In this situation he can both gain money and lose them. Everything depends upon the currency the currency profiteer trades right in the moment as state banks of different countries establish certain rates for their national currency. These rates are allocated on the paid funds and can be called:

* Refinancing rates;

* Dealing rates.

Swap influence on the trader

To better understand the meaning of the Forex swap let’s look at one example. If the trader uses the pair Swiss Franc (CHF) – US Dollar (USD) he has to take Swiss Franc which broker borrows from the National bank of Switzerland at the certain rate and after that to buy US Dollars. Rates are also allocated on the US Dollars. The difference between US Dollar rates and Swiss Franc rates influences the size of the swap for the Forex trader. However there is more to come. The broker also gains some profit from each transaction of his client.

So, Forex swap is a certain rate calculated in the following way. If the rate for Swiss Franc is 2%, for US Dollar is 1% and the broker takes 0,2% for his services the trader who opens CHF/USD position receives 2% on the borrowed Francs, gives 1% for US Dollars and loses 0,2% on the broker’s commission. Thus, the currency profiteer increases his money laid out for this transaction by 0,8% every day.

It is calculated as follows: 2% - 1% - 0,2% = 0,8%.

The given example shows that the trader obtains a little daily bonus just for the fact that he has opened a transaction for the given currency pair. In the long-term Forex swap is a good instrument for obtaining a passive income.

Negative effect

However the swap on Forex can have a negative effect when the trader loses his money little by little every day by opening a transaction. For example, he trades a US Dollar (USD) – Great Britain Pound (GBP) pair. In this case the trader takes US Dollars obtaining 1% for them, buys GB pounds with allocated rate of 4.25% and loses 0.2% on the broker’s commission. As a result, the formula of the daily swap is calculated as follows:

1% - 4.25% - 0.2% = -3.45%

Thus, the amount of money allocated for this transaction will be reduced by 3.45% every day just for being placed on the market. It is evident that the understanding of the essence of the Forex swap is vitally important while calculating potential profit and risks for each trade transaction.

SWAP FREE accounts

It should be mentioned that Forex swap is not an obligatory condition of trading. It is rather logical and natural. At first the problem of working on Forex occurred when traders from Muslim countries started trading on Forex. The Muslim religion happened to prohibit its people trading with daily swaps. The Shariah laws were so strict that international currency market had to react on this situation and introduce certain alternative schemes of working with such clients.

The common practice includes several approaches that allow using SWAP FREE accounts or “Muslim accounts” as they are often called.

1. Broker stipulates the commission fixed in advance instead of the swap. His clients calculate it in their trading activity. Among such dealing centers one can name Roboforex and others.

2. Another approach lies in the idea that Muslims work without any swaps and additional payments. So this approach guarantees that the client can be sure that the profitability or unprofitability of the transaction will be influenced only by the exchange rate of the chosen currency pair not depending upon the period the trading position remains open. For example, among Forex brokers working without swaps for Muslim traders there is InstaForex and others.

3. There is also one approach that is not so popular as two above mentioned approaches. This approach anticipates that SWAP FREE accounts are offered to clients who apply trading schemes which don’t calculate the influence of the swap.

Summary

To sum it up, Forex swap is very significant factor especially in long-term trading. It is necessary to know how to calculate and apply it in your trading activity correctly and improve the efficiency of your trading strategy (system).