So we come to a discussion of the processes occurring in the forex market. A forex swap is a difference in interest rates on loans of two currencies, credited to the account or charged from the account when transferring a trading position to the next day. A swap can be either negative when you pay, or positive when they pay you.
The central banks of each country determine the key interest rate. In fact, this is the percentage at which the central bank lends to other banks. This rate may vary throughout the year, but its starting value is determined at the first meeting of the central bank of the year. Trading in the currency market takes place in currency pairs, two different currencies participate in the transaction, and each of them has its own interest rate.
The currency pair contains the base and quoted currencies, one currency that we buy and another currency that we use to buy. The base currency is also called escrow. She is ours and the exchange uses it during the day, for which, of course, she must pay us a certain percentage. Quoted currency is also called credit. It is a bank, and we already borrow it from the bank, and we pay the bank a percentage for using its currency, much like with a consumer loan.
To understand when we pay for a swap, and when we pay, let’s look at the principles by which a swap is calculated:
There is a fairly simple formula, it is depicted above. The most important parameter of this formula is the difference in interest rates between the base and quoted currencies. For example, you can compare rates on the EURUSD currency pair. The ECB rate is now at 0% (loans, in fact, are free), and the Fed rate is set at 2.5%. Thus, if we buy a currency pair, we must subtract the quoted rate from the base currency rate: 0 – 2.5 = -2.5. That is, when buying this pair, the difference in rates is negative, and therefore the swap will be negative. But when selling a pair, we should vice versa subtract the base one from the quoted one: 2.5 – 0 = 2.5 – the swap will turn out to be positive. In this way, we determined only the sign of the swap (you will pay, or they will pay you), and if we want to know the meaning of the swap, we need to substitute all the values in the formula.
- Example 1. EURUSD
SWAP (buy) = (100,000 * (- 2.5 + 0.2) / 100) * 1.12177 / 365 = -8.21 EUR or about -10 USD.
SWAP (short) = (100,000 * (2.5 – 0.2) / 100) * 1.12177 / 365 = 7.06 EUR or about 8 USD.
- Example 2. USDRUB
SWAP (buy) = (100,000 * (2.5-7.5 + 0.2) / 100) * 63.5067 / 365 = -991.74 RUB or about -15.61 USD.
SWAP (short) = (100,000 * (7.5-2.5 – 0.2) / 100) * 63.5067 / 365 = 922.15 RUB or about 14.52 USD.
If you trade within a day, then the swap may not be of any interest to you at all, since you work either with a simple commission or with a spread. And if you adhere to a long-term trading strategy, like me, you need to constantly know the size of the swap, because you will pay for it every day if you are in the direction of a negative swap, for example, when buying with EURUSD.
Reasons for swap change:
- Change in the monetary policy of the state. This event does not occur so often. Currently, the decision on interest rates is taken 12 times during the calendar year. It is every month that central bank meetings are held, at which a decision is made to change the interest rate or to remain at the same level. Most often, in conservative countries and strong global economies, the interest rate during the year either does not change at all or changes only 1 time. In the Eurozone and the USA, rates change very rarely, their value is close to 0, so when working with the EURUSD currency pair, swaps are almost the same throughout the year.
- Change in the size of the markup. Markup is what the broker feeds on. This broker’s commission wrap-up amount of the swap is set in order to earn on the support of long-term transactions of its clients. The magnitude of the markup is a hot topic for debate and discussion in the trading community. It is understandable: when you lost money as a result of a misunderstanding of the bidding process, you will never admit it, and you will always look for the guilty on the side. And the closest friend to you is the broker and all the cones, of course, go to him. Here we recall the spreads and predatory swaps, and so on … In fact, the markup has almost no effect on the result of your trade. The main reason is that 90% of traders do not have a clear understanding of trading and a well-established strategy, and therefore more often trade within the day or, at the most, are delayed in the position of the day by 2-3. During this time, the swap simply does not have time to accumulate, and even 10% of the markup on the net swap does not affect your trading result. Markup becomes noticeable to traders who work long-term, but, again, the loss is small. Here’s a simple example for you: I’ve been in a long position for a couple of years already AUDNZD. Swap for 63 days in the transaction paid 62.9 USD. Now I specially calculated the value of the net swap without markup, it turned out to be 52.37 USD. Total: the broker earned me a little more than 10 USD. Do you really think that markup is the main cause of your failures?