What are Swaps in Trading Forex and other Financial Instruments?
When the trader wants to increase his trading position, the trader seeks a leveraged fund. This means that the trader asks to borrow funds from the financial service provider, which is usually in a foreign currency. For this purpose, the interest fee is either paid by the trader if the position is short or to the trader if the position is long. This occurs at the end of each trading day in case the position stayed open overnight. The traders who aim to profit out of the interest swap are called carry traders.
Positive carry trade will be paid to the trader as a net amount after offsetting and is added directly to the traders’ account. If the carry is negative it is deducted from the traders’ account directly. Taking into consideration, this is not part of INGOT Brokers policy since all traders are required to pay for both positions.
Generally, if the currency bought has a higher interest rate than the one sold, a swap will be credited, and the opposite is correct. The trade that is opened and closed within the same day has no interest consequence.
How are Swaps Calculated?
Swaps are calculated in pips per lot depending on the instrument. You can always check our page for the swaps on different financial instruments and forex pairs. Three-day swaps are applicable on Wednesday or Friday depending on the instrument. Below is the equation to calculate swaps. Please note that on our page it is calculated already in dollars per lot.
Swap = (Pip Value* Swap Rate* Number of Nights)/10
Islamic swap-free accounts do exist, which were developed for Muslim traders. However, other trading fees may be applicable, after a grace period of holding the asset. Also, there might be no charges at all, but with higher spreads. This depends a lot on the financial brokerage firm.
Traders usually like to magnify their funds to increase their pay-out on investments by asking for margin. This leverage allows them to trade in larger positions using smaller funds, and swap charges can be compensated by those profits.