Besides the spread and commission fees, the swap fee is one of the most basic transaction fees when you invest in forex. Basically, swap fees are applied to overnight transactions, but there are also traders who take advantage of swap fees to build a simple but effective trading strategy , called a carry trade.
In this article, lotforex will help you understand what a swap fee is, why there is a swap fee when trading forex, who needs to care about swap fees, and how to take advantage of swap fees when trading with a carry trade strategy.
Table of Contents
- 1 What is the swap fee? What is rollover fee?
- 2 When is the swap fee calculated?
- 3 How to calculate swap fee when trading Forex?
- 4 What is the impact of swap fees on trading?
- 5 Triple swap phenomenon (swap fees tripled)
- 6 What if you don’t want to charge swap fees?
What is the swap fee? What is rollover fee?
What What is Swaps? In English, swap means swap. In the Forex market, swap means the simultaneous buying and selling of the same amount of one currency with another for more than one trading day.
What is the swap fee? Swap fee, also known as swap rate, rollover, swap rate, overnight interest is the difference you need to pay to the exchange (or can receive) if you open an overnight trade. The swap fee is derived from the daily adjustment of the interbank rate difference, and the trader needs to pay (or receive) the amount incurred due to the exchange rate adjustment.
To make it easier to imagine, let’s say you buy USD/JPY on exchange A. In this trade, you are buying USD and selling JPY.
Assuming the default currency you choose in your trading account is USD, then you need to “borrow” JPY with a certain interest rate to make this transaction (because you don’t have JPY available in your account) .
Second problem, in most Forex trading, you will have to leverage some percentage ( margin trading ), in other words you will “borrow” USD from the broker in response to the amount transaction volume.
Thus, you “borrow” USD to increase trading volume, amplify profits and “borrow” JPY to sell to the market.
If: USD loan interest rate is lower than JPY loan rate, then you will enjoy a positive swap fee (plus money in the account). In the opposite case, you will pay swap to the broker when the USD loan interest rate is higher than the JPY loan rate.
Important points about swap fees
- Swap fees for different asset classes are different
- Trading conditions, such as asset volatility, are always changing, so swap fees are also constantly changing. We call this floating swap.
- Brokers have slightly different swap fees for the same asset, as each broker may be associated with different liquidity providers.
- Swap fees are based on standard lots, which means 100,000 trading units.
When is the swap fee calculated?
Is the swap fee? What is rollover fee?
Swap fees apply to overnight transactions, and the session start and end time is 5:00 pm EST (equivalent to 4 AM the next day Vietnam time ).
Let’s say you open a trade at 4:50 PM EST and close it at 5:05 PM EST, even though it only lasts 15 minutes, it will be counted as an overnight trade and you will have to pay (or receive) swap fees.
Conversely, if you open a trade from 5:01 PM EST on Monday, extending until 4:55 PM EST the following Tuesday, the trade is not counted as an overnight trade.
How to calculate swap fee when trading Forex?
Basically, when you buy a currency pair, you are buying and selling currencies at the same time with the aim of swapping that currency with the broker later.
If you do not swap against the currency at the end of the session, you must pay the exchange so that the broker can maintain your position.
Example swap fee in sell transaction
For example, the EUR/USD pair is trading at 1.2500, and the US federal dollar interest rate at the time of the trade is 2.5%, while the European Central Bank EUR interest rate is 3.25%.
If you open a short trade (short, sell) 1 standard lot of EUR/USD, that means you are selling 100,000 EUR with a loan interest rate of 3.25%, your grandmother buys USD at an interest rate of 2, 5%. The interest spread in the transaction is 0.75.
For example, your broker charges 0.25% service fee for overnight trading. Since the interest rate in the selling currency (EUR) is higher than the interest rate in the buying currency (USD), the swap fee for this transaction (additional service fee) is 1%.
In this example, we use a 1-year 365-day cycle (however many brokers will use a 360-day cycle, depending on the type of asset traded).
Swap fee = (Contract size x (Interest rate difference + brokerage service fee)/100) x (exchange rate/number of days in a year cycle)
Swap fee =(100,000 x [0.75 + 0.25] /100) x (1.2500/365) = 3.42 USD
Example swap fee in purchase transaction
Following the above example, suppose you place a buy order. Try to calculate how much the swap fee will be.
When you buy EUR/USD, you will buy 100,000 EUR and receive an interest rate of 3.25%, and sell USD with a loan interest of 2.5%.
In this transaction, the swap fee is positive swap (buying currency interest rate > selling currency interest rate). The broker still collects 0.25% of the service fee, so the swap fee will be calculated by the formula:
Swap fee = (Contract size x (Interest rate difference – brokerage service fee)/100) x (exchange rate/number of days in a year cycle)
Swap fee = (100,000 x [0.75 – 0.25] /100) x (1.2500/365) = 1.71 USD.
Since in this trade you are buying EUR and the EUR interest rate is higher than the USD interest rate, you will be credited with an additional amount of USD 1.71 to your account for overnight trades.
What is the impact of swap fees on trading?
The higher the volume of transactions, the higher the swap fees, which means that if you want to trade overnight, you must consider this transaction fee carefully for long-term trades. By calculating the swap rates of these trades in advance, you can predict and decide how long you will hold your position in order to make a profit.
Triple swap phenomenon (swap fees tripled)
If you look at the swaps from Monday to Friday, you will realize that the swap on Wednesdays will be 3 times higher than the rest of the week , and this phenomenon is called triple swap, and almost all Forex brokers all apply triple swap on Wednesdays (although there are still forex brokers that do on Thursdays or Fridays).
The reason for the triple swap is because the Forex market will be closed for two weekends, in theory, there should be no swap fees on these two days. However, banks still charge interest on transactions held during the weekend, so the Forex market applies a Triple swap on Wednesdays to adjust the interest rate for the weekend.
In other words, if you intend to hold the trade past Wednesday, you will have to pay the swap fee 3 times!
What if you don’t want to charge swap fees?
Most brokers show swap fees for each traded asset, so you don’t have to charge them. Some brokers also offer a swap calculator if you want to simplify the calculation process.
You need to keep in mind that swap fees when buying and selling the same asset will also be different. Therefore, you need to pay close attention to the swap rate for each type of Buy or Sell transaction before placing an order.