Swap trading allows traders at all levels to hold positions overnight by borrowing from their broker, with interest due to keep the position open. Frequently applied to forex and CFD trading, swaps are a valuable trading tool for managing both costs and strategy, opening up opportunities to traders.
This beginner’s guide will cover the essentials of swaps trading, helping traders to understand the concept of swap trading and its impact on trader positions in CFD markets. We will cover:
- What trading swaps means and how swaps are applied
- The role of interest rate differentials in swaps
- How swaps affect profitability in trading
- Where to find swap rates on the ActivTrades platform
What Are Swaps in Trading?
In the context of CFDs and forex, the meaning of swaps in trading is defined by the concept of borrowing money to hold a position overnight. Based around the concept of leverage, this allows traders to access their desired positions and subsequently either pay an interest (swap) fee or earn interest back.
Leverage increases the risk of loss and traders should always prioritise a solid understanding of any risks involved with integrating leverage into their trading plan, as well as a taking a strategic approach in line with individual risk appetite.
How Do Swaps Work in Forex and CFD Trading?
Depending on whether traders opt for a short-term or long-term swap, swaps trading can be used as part of a wider forex and CFD trading strategy to manage currency risk, take advantage of differences in interest rates between currencies, or hedge against currency exposure.
For example, to take advantage of an opportunity with a specific currency pair if interest rate rises have been predicted or a specific macro event suggests a currency may grow stronger, traders can open a CFD position to take advantage of this forecast. The forex swap can be utilised to manage the overnight position.
Swaps in forex trading are either earned or paid based on the interest rates of the currencies involved. The swap fee is based on the interest rate differentials between the two currencies. The contract size and the number of nights positions held are also part of the calculation, with the final amount subject to individual broker adjustments.
Every swap in trading can be either positive or negative. When the trader holds the currency with a higher yield, they earn swap credit, but if the trader holds the lower-yield currency, they will be charged a swap fee.
Swap fees are typically charged or credited daily when the trading day officially closes, also known as the rollover time.
How Spreads and Swaps Work Together in Trading
While some people assume that spreads and swaps are interchangeable, these are actually two very distinct and different components of trading. Swaps refer to interest charges or credits for holding positions overnight, while spreads are entirely focused on the cost paid upfront when opening a trade (the difference between the bid and ask price). Together, spreads and swaps make up the total trading cost.
While some traders may have a short-term trading style and hold positions for just 24 hours, if you are holding positions beyond a single day then it’s crucial to evaluate the costs involved with both spreads and swaps.
For example - a tight spread might reduce entry costs, but a negative swap can reduce profits over time. On the other hand, a positive swap could balance out a wider spread on longer-term trades.
Balancing the right combination of spreads and swaps can help to support a strategic, personalised trading approach and effectively manage the costs involved with swaps trading.
Where to Find Swap Rates on ActivTrades
The ActivTrades platform has been expertly designed to offer a user-friendly experience with easy, clear navigation. Swap rates and charges can be viewed for all major, minor and exotic forex currency pairs in a clear tabular format, showing rates for swapping long and swapping short alongside current and target spreads.
When trading swaps, the cost of holding positions should be monitored as swap rates themselves change day to day based on market conditions and broker policy. Transparency and cost awareness should be an integral part of any swaps trading strategy. This is a market where volatility is consistently present and needs to be factored into your chosen trading approach.
FAQs – Trading Swaps
What is the difference between spreads and swaps in forex trading?
Swaps refers to the fees or credits due on trading positions held overnight while spreads refer to the upfront costs for opening a trade.
Is swaps trading suitable for beginner traders?
A swap in forex trading or CFD trading is an easily accessible tool designed to support every trader in their journey regardless of experience. Traders will usually start their journey with account setup on a reputable brokerage platform that prioritises solid customer support and a high-quality user experience.
What is a swap free trading account?
This refers to a trading account with no swap fees and no commission for holding positions overnight, usually reserved for Muslim traders who cannot engage with swaps or interest-related trades due to their Islamic faith.
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