What is Swap in Forex? Swap Calculation in the Forex Market

In the forex market, Swap is an amount determined due to the difference in the bank interest rate of two currencies in trades open for more than one day.

In the forex market, there are many points and terms that traders must master. Swap is also one of these terms. If a trade in the forex market is open for more than a day, it is subject to a swap, which can be positive or negative. Stay tuned to learn more about this topic.

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What is Swap?

In the forex market, swaps are created due to the difference in the bank interest rates of two countries or currencies. Swap includes trades open for more than one day, which can be positive or negative based on the type of transaction (buy or sell). For example, suppose a trader has made a transaction in the Euro-Dollar currency pair (EURUSD) and the interest rates of the US Central Bank and the European Central Bank are different, and this trade has been open for more than one day, so a swap will be charged to this transaction.

Swap in the forex market is applied at the end of trading, that is, at 5:00 PM US time. In other words, a swap is charged to trades not closed before 5:00 PM.

Swap calculation formula

Different parameters are effective in swap calculation. A swap's main criterion and basis is the difference in the interest rates of the two currencies traded. Due to the decentralized forex network, there are no specific institutions or rules for all brokers. That is why the swap rate may differ slightly for brokers. In general, most brokers, including Trendo Broker, use the formula shown in the image below to determine the Swap:

The broker has already calculated the swap rate for each symbol, and users can find out about the swap rate through their broker, and there is no need to calculate it.

One of the parameters in the formula is the difference between the interest rates of the two currencies. The interest rate of countries can change several times a year. However, the basis for determining the interest rate in the formula is the first interest rate of the year, and this rate remains constant until the end of the year.

The second factor that affects the amount of swaps is the trading volume. Therefore, the higher your trade volume, the higher the swap rate will be applied.

The third factor in determining the swap rate is the broker's fee, which will be different for each broker. In this regard, by upgrading its infrastructure, Trendo Broker includes the lowest cost for swaps, and we can say that this parameter has almost no effect on Trendo Broker's swap rates.

The difference between swaps in buy and sell trades

In calculating the swap rate, the difference between the base exchange rate and the counter currency is important, and this difference is in the following two cases according to the position of the currency and the type of transaction (buy or sell):

• Positive Swap
• Negative Swap

With the gold symbol, for example, the Swap in the buy transaction (swap long) is a negative amount, and if the gold buy transaction remains open for more than one day, the swap amount will be cut from your account. When the swap in the sell transaction (swap short) is a positive amount, and the gold sell transaction remains open for more than one day, the swap amount will be credited to your account.

Swap in Trendo Broker

In Trendo Broker, you can view the details of the symbol, including buy and sell swaps, by clicking on and holding the desired symbol. As you can see in the image below, the details of the gold symbol (XAUUSD) are displayed. Currently, in Trendo Broker, Swap Long is $-2.35 for each 1 lot, and Swap Short is $1.04 for each 1 lot.

Swap on Wednesday

Note that Swap on Wednesday is three times the usual rate. Therefore, if you have an open transaction at the end of Wednesday, three times the usual rate, a swap will be charged on the transaction. The reason is the three-day bank loan interest settlement and forex spot market settlement, which is done simultaneously on Wednesday due to weekend closure (Saturday and Sunday). Remember, there is no swap on Saturdays and Sundays because they are closed.

Swap in Cryptocurrencies

In cryptocurrencies, there is no swap the way it is in the forex market, but there is a process almost similar to a swap in cryptocurrencies, which is called the funding rate. Note that the term funding rate is no longer used in brokers offering cryptocurrencies for trading, and the term swap is used for cryptocurrencies along with forex symbols.

On the other hand, exchanging one currency with another token or currency in cryptocurrencies is called a swap, which is unrelated to swaps in the forex market.

Islamic account (swap-free)

Some of the forex market rules do not fully comply with Islamic laws. One of these laws is the difference between interest rates and swaps. That is why some brokers offer Islamic accounts to their Muslim customers, which do not involve swaps.

In this regard, Trendo Broker has also offered Islamic accounts. To convert your account into a swap-free or Islamic account, proceed through the broker's support. Please note that Islamic accounts in Trendo Broker are not different from the main account in terms of commission and spread, and only because of Islamic laws, the currency pairs and gold swaps are zero.

The difference between swap and commission

The commission is a fixed amount the broker receives in each transaction based on your trading volume, but a swap is the overnight interest rate, and unlike the commission, it can have a positive or negative amount. Commissions are charged on all trades and are not related to how long a trade is open, while swaps are only charged on trades open for more than a day.

Summary

We reviewed the swap and its calculation formula and learned that swaps will be charged if a transaction in the forex market is open for more than one day, which can be positive or negative. However, swaps are not applied to trades in Islamic accounts. We also reviewed the swap rate in Trendo Broker, which was very small and insignificant compared to other brokers, due to the low fee from the broker. Finally, we recommend considering the swap rate in your risk management if you intend to make long-term trades.