Forex Swap! What is it? How does it work and is it always a negativething? Everything in this video! Hello everyone, welcome back to my channel.
This is Federico Sellitti, Forex Trader since2007, Udemy instructor since 2017.
Today I want to talk about Forex Swap Rate.
What is a Forex Swap Rate? Let's start from the definition: a Forex Swaprate is defined as an overnight or rollover interest, that is earned or paid, for holdingpositions overnight in foreign exchange trading.
I want you to focus on two main things.
The first one is: earned or paid.
So it doesn't necessarily mean that you needto pay a commission.
You can also get paid a commission.
And the second thing is: holding positionsovernight.
So it is an interest that you pay or you getpaid daily.
But overnight can also be a misleading termbecause if you are in India, for example, or if you are in the United States, what doesit mean overnight? Is it at the end of your day or it is anothertime? Well, overnight usually means at the end ofthe New York session and I will put a link in the description for this video, you canfind a link to check the end of the New York session for your time zone, so I will putthe link in the description, it's forexmarkethours.
Now, if you check the page of your brokerregarding the Forex Swap rate, they usually say that it is based on many market conditions, but the main condition is the interest rate.
When you buy a currency of a country thathas a better interest rate than the country of the currency that you are selling, youhave a positive SWAP, so you earn your interest at the end of the New York session.
If you are buying a currency of a countrythat has a worse interest rate than the country of the currency that you are selling, youhave a negative SWAP, so you are going to pay an interest at the end of the tradingday, at the end of the New York session.
I know that it may sound a bit confusing, so I want to give you an example.
Here we are on investing.
com and you havea list of the main central banks in the world and you have also the interest rate.
Now, let's say that you want to buy EUR/USD, you can see that the interest rate for the European Central Bank is 0% and the FederalReserve has an interest rate of 2.
So you are buying a currency that gives youan interest rate of 0% and you are selling a currency that gives you an interest rateof 2.
So you are buying the currency that has theworse interest rate compared to the other one.
In this case, when you hold your positionovernight, you are going to pay an interest to your broker, so the SWAP will be negative, but what if you want to sell EUR/USD? In this case, you are buying the currencythat has the higher interest rate compared to the one that has the lower interest ratein this case, that is the euro.
So, in this case, you are buying a currencythat has an interest rate of 2.
25%, selling one that has 0% of interest rate.
So, in this case, you have a positive SWAPand you will earn your interest overnight for holding your position after the New Yorksession.
So I think that now it is clearer what theSWAP is and how it works, so I want to try to answer 4 main questions related to theSWAP rate.
The first one is:does it always work likethis? Second question is: how much am I going topay or to get paid as an overnight interest? Third question is: are there trading strategiesthat try to take advantage of the SWAP rates? And last question, the fourth question is:can I avoid the SWAP rate? Let's start with the first question.
Does it always work like this? No, it doesn't always work like this, becausethe broker will also charge you a commission.
So I want you to check the Darwinex page relatedto the SWAP rate.
For example, we have AUD/CAD.
You can see that, if you open a lot, you havea SWAP interest that you need to pay overnight of -1.
80 CAD, but also if you have a shortposition, you pay 4.
20 CAD, so in both cases, you have a negative SWAP.
But, if you check the page of the centralbanks, you can see that Reserve Bank of Australia has the interest rate at 1.
50 and Bank ofCanada has the same interest rate at 1.
50, so it should be that you don't pay any interestrate overnight for this kind of position, either you have a long or a short positionon the market because the interest rate for the two central banks is the same, so it shouldbe 0 here and 0 here.
But your broker is going to charge a commission, so, in this case, you have a negative SWAP rate for both your positions on AUDCAD.
Then a second question is: how much am I goingto pay or to get paid as a SWAP interest? Well, not much to be honest.
For example, here we have what we need topay for a contract, so for an entire lot.
So let's assume that you are trading justa microlot.
So, in that case, it will be -0.
018, so 1.
8cents of Canadian dollar, so not that much.
And, also, I have had a question: should Iconsider the SWAP rate in my trading strategy? Well, in my opinion, you shouldn't and I tryto explain why at my best.
First of all, because if you are a scalperor a day trader, you usually don't hold your position overnight, so you shouldn't considerthe SWAP rate in your case.
If you are a swing trader or a position trader, you usually don't have targets that are below 20 pips, usually your stop loss, your takeprofit are 20 pips or even more than 20 pips.
If we consider, for example, a long positionon AUDCAD, with a stop loss and take profit of 20 pips, we have a commission that we needto pay of 0.
018 CAD, I'm considering a microlot on the market.
20 pips with a microlot on this position, if you have an account in USD, it's more or less $1.
60 for a target of 20 pips.
So here, you are going to pay 1.
8 cents otCAD on your position.
In USD, it would be around 1.
5 cents of USD.
So you pay a SWAP interest overnight thatis 1.
5 cents of USD, so, more or less, 1% of your target of 20 pips.
If you risk 1% with your position, 1% of youraccount for each position that you open on the market, you have an interest that youpay that is 1% of your position, but your position is 1% of your trading account.
So the interest that you are going to payis 0.
01% of your account, so it's a very very small amount that you pay every day that youhave your position overnight.
So I wouldn't consider the SWAP interest inany trading strategy.
I know that it may sound a bit superficialor a bit inaccurate, but really, if you do your calculation, you will find out that itis a very very small amount that you need to pay or that you get paid by your broker, so I wouldn't consider it in my trading strategy.
The third question was: are there strategiesthat are using this SWAP interest to trade? Yeah, there are some strategies and the mostpopular one is the so called “carry trade”.
Now, if we have again a look at the centralbanks, you can see that there is Central Bank of the Russian Federation that has 7.
50% asan interest rate and there is Swiss National Bank that has -0.
75%, so traders that wantto adopt this kind of strategy called carry trade, usually open a position in favor ofthe currency that has a high interest rate, so in this case the Russian Ruble, and theysell the currency that has a very low interest rate, in this case, for example, the SwissFranc that has a negative interest rate.
So they want to buy the RUB and sell the CHF, so they open a short position on CHF/RUB and they try to collect the interest that thebroker is going to pay them, every day, the SWAP rate that the broker pays them everyday.
But it's not as easy as it seems because it'snot just about collecting the interest that the broker is paying every day.
It's also about considering the current positionthat you have on the market.
if you are selling CHFRUB, of course you aregoing to get paid an interest overnight because of the SWAP rate, but you also need to considerthat if the price is not going down, but it's going up, you are having a loss on the marketbecause you have a short position on the market.
So it's not just about collecting the interestevery single day, it's also about finding the right time to enter on the market, becauseif you open just like that a short position, just to collect the interest every day, itmay also be that the price goes up and you lose more money than the money that you arecollecting with the interest rate.
And last question about it is: can you avoidto pay or to get paid this SWAP interest.
Of course you can, you only need to removeyour positions on the market before the end of the New York session.
Once again, I will put the link in the description, forexmarkethours, so you can check the end of the New York session in your time zone.
So to avoid to pay the SWAP interest, or toget paid the SWAP interest, so to avoid the SWAP at all, you just need to remove yourpositions before the end of the New York session.
That's all for today, I hope that the SWAPrate in the Forex market is a bit clearer now and, if you have anything that you wantto add to this video, for example, if you used to be a carry trader, make sure to commentin the video and let me know your opinion about it.
So, as always, I wish you a great tradingcareer and I will see you in the next video.
Thank you for watching.